Monday, October 21, 2013

September US Non-farm payrolls report: Better late than never


Today is the day when the delayed US Non-Farm Payrolls report will be released, having been placed on hold due to the recent government shutdown. These payroll figures, and the unemployment rate that will be released along with them, are important. They are perhaps the largest single factor considered by the Federal Reserve for its decision as to whether or not Quantitative Easing (QE) will be dispensed with sooner rather than later.

Many believe that the government shutdown creates its own issues with regard to QE. The deal that has been done, the theory goes, is only a temporary one, and the whole fiscal cliff, threat of government default and a further closure will be top of the news when the Fed carries out its early 2014 deliberations.

There is an opposing view, however. Based on the behaviour of a number of currency pairs, both before and during the shutdown, there are many who believe that, for the markets at least, the posturing in Washington is just that, a piece of political theatre that is largely irrelevant to bond and currency trading. Consider the AUDUSD pair. It came crashing down when tapering was first mooted, both because of a consequential strong USD and the start of an easing cycle in Australia, when interest rates were reduced on a number of occasions. Now that easing cycle is over, there has been a decisive result in the Australian Federal elections in favour of a business positive government, and China, Australia's biggest customer, is hitting its numbers. There was a rebound in the Aussie, but nothing like what would have been required to bring it back to where it was.

And then there is the price of gold. Tapering is dynamite as far as gold is concerned. If the debt ceiling debate and all the other stuff going on in Washington is to significantly delay tapering, why is gold still in a downtrend?

Bottom line is that employment is far, far more important for any Fed decision on QE than anything else, and that includes seemingly paralysing disputes between Republicans and Democrats on Capitol Hill.

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