AUD focused on equities rather than employment – 0.78 toppy for now

Strong US data bring Biden stimulus into question

JPY weakness likely to see some extended correction

NOK and SEK have potential for gains

Australia’s labour market performance in January has largely met expectations and continues to be supportive of the V-shaped recovery that has surpassed the expectations of most. There were only very mixed and minor reactions from AUD, which remains focused on equities.

The AUD has softened slightly as equity markets have dipped in the last couple of days, and equity market performance is still likely to be the primary focus for AUD/USD (and AUD/JPY). This is primarily dependent on the market expectation of the Biden fiscal package, its impact on the economy and the Fed reaction.

The strength of Wednesday’s January US retail sales data, backed up by the strong PPI and industrial production numbers, and the strong Empire Sate manufacturing survey this week, has supported the rise in yields but will create some doubt about the need for a big fiscal stimulus from Biden. In practice, stimulus is still likely, but its size may be reduced, and as long as that is the case, the markets probably won’t be too worried about an early Fed reaction to strong growth or higher inflation. Even so, inflation numbers are likely to rise as the year goes on. Without a Fed reaction, this is ultimately positive for equities, which are nominal entities, and will also be helped by the implied decline in real interest rates, and this should also mean that the USD downtrend continues. Only when the market starts to fear a Fed reaction is the equity market likely to suffer and the USD likely to gain any sustained boost, and this still seems a long way away. 

Even so, these concerns may persist for the short run, and allow some pause to the uptrend in equities and the “riskier” currencies. Recent price action has suggested a refocus on yield spreads as an FX determinant, which is a more solid fundamental basis for FX valuation than the correlation with equities. This has helped further weaken the JPY in the short run, because Japanese yields have not responded to the rise in US yields to the same extent as elsewhere, partly because of the BoJ’s policy of yield curve control. But a refocus on yields should in the end prove JPY supportive, as Japanese yields have fallen much less than most in the aftermath of the pandemic, while the JPY has been one of the weaker performers due to the focus on the correlation with risk. While the correlation with equities is unlikely to completely disappear, a more stable equity market should allow some corrective JPY gains. 

Swedish CPI data was stronger than expected but had little impact, but it is notable that EUR/SEK is now hovering just above the psychologically key 10 level. Yield spread correlations suggest scope for a break below, albeit a modest one. However, it was notable despite the strength of the oil price on Wednesday that EUR/NOK moved higher, failing to follow the oil price uptrend, perhaps because of the slightly weaker equity performance. But the NOK still looks likely to extend recent gains if the oil price holds near current levels.