Intraday Market Thoughts

Hawks Launch Flight to Safety, Falling AUD Awaits Jobs

by Ashraf Laidi
May 11, 2011 23:53

Inflation worries gripped markets on Wednesday, sending growth-sensitive currencies sharply lower. Oil and silver led a rout on commodities while stock markets fell more than 1%. The Australian dollar fell ahead of todays employment report.

Market sentiment was driven by speculation central banks will be forced to hike rates before the economic recovery becomes firmly entrenched a stagflationary scenario. A number of headlines drove the moves: 1) Chinese CPI rose 5.3% y/y in April compared to the 5.2% expected. 2) The Bank of England rose its inflation outlook and cut growth forecasts for the fourth consecutive quarter. 4) German inflation climbed to 2.7% y/y, higher than expected. 5) The Feds Kocherlakota called for a 50 basis point rate hike before year end.

USD was the top performer while AUD lagged. Talk of rate hikes in the UK initially sent sterling surging but risk aversion erased a large portion of the gains. Commodities were a major story as oil fell $5 per barrel to $98.75 following a US storage build. Silver also erased most of its three-day rebound, falling to 8.6% to $35.15. For key levels in silver and for Ashrafs trade that best navigates swings in risk appetote, see todays Premium Piece:


At 0130 GMT Australia will release April employment data. The unemployment rate is expected to remain steady at 4.9% and the economy is forecast to add 17.4K jobs following a 37.8k increase in March. A positive surprise could leave AUD bulls in a tough spot. A fall in the unemployment rate to 4.8% with the participation rate holding at 65.8% would ramp up rate hike expectations and could boost AUD. At the same time, FEARS & HEADLINES ABOUT CHINESE TIGHTENING and the broader risk averse mood would limit gains. Remember that speculators remain in a heavily long AUD position and, given the overall market mood, the bias will be to use AUD strength to lighten up. A negative surprise will be more straightforward AUD will weaken, especially against JPY.

By AB - Staff


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