Goldilocks is back at the table

Goldilocks is back at the table

The strong payrolls growth in February which swept past all expectations were tempered by softer-than-expected average hourly earnings (AHE) reading leaving the market with a bit of dilemma as we near March FOMC forward guidance. On the surface, the headline was strong enough to shift their dot plot need, but there remains the begging the question about the fuller inflation prospects.

So wage growth remains muted – and with this week’s CPI unlikely do indicate a significant uptick in inflation, investors are left mulling over what this all mean for interest rates and specifically should they continue to move higher amid signs that lower taxes and higher public spending will most certainly lift short-term growth. Despite the positive economic narratives, the tepid wage growth suggests the Feds will be in little rush to move into the four rate hike camp.

Trump’s trade agenda and the recent North Korea news continued to dot the weekend news flow.

The remarkable turn of events in North Korea has sent a wave of positivity through the region, but there remain many obstacles to overcome, but on the surface, any talk is a good talk between these political nemeses. Financial markets in South Korea have reacted positively to news of the meeting. The KOSPI and the WON improved cheered on by the prospects for the Tump -Kim meeting

On the tariff front, Australian Prime Minister Turnbull confirmed that Australia would be exempt from US steel and Aluminum tariffs.

Equity Markets

The best of both worlds for equity markets, with the economy in full swing but nary a sign of wage inflation. It doesn’t get much better than that for investors and at least for now have dampened the inflationary fears that weighed on investor sentiments in February.But when coupled with an easing in trade rhetoric and positive news from the Korean Peninsula, risk sentiment is powering higher.

Goldilocks returns at least for a day.

Oil Markets

Oil markets rallied sharply after the stellar US jobs reports which rocketed the S&P higher and in general sparked a wave of global risk-on trade. But oil traders are banking on the stronger than expected jobs reports to translate into higher oil product demand. Finally, oil bulls cheered on the Baker Hughes reports which indicated the number of oil drilling rigs fell by four to 796 last week.

Gold Markets

The markets are turning more neutral yet cognizant of upside risks. The US dollar, at least for now, is trading with a bit more swagger, Tumps trade and tariff rhetoric has eased, and with the US- North Korea meeting set to take place, investors are in a happier spot. With Goldilocks back at the table, at least for today, gold hedge appeal could be tempered near term.

Currency Markets

Japanese Yen

With positive risk sentiment gripping the markets and with USDJPY looking to squeeze a bit higher on the Goldilocks jobs report,  positioning could take over. A good portion of the market remains short, but with risk sentiment looking very bubbly in early APAC, risk on could flush out some weaker hands sending USDJPY to the fundamental 107.30 level.

The Euro

Draghi, the master of illusion, has taken much of the top side momentum out of the Euro. The softer data flow and the overall dovish ECB take should cap strength over the near term.

The Australian Dollar

Lacklustre AHE but strong NFP favours the ‘goldilocks’ economy scenario so risk assets should remain bid which will underpin the Aussie dollar. Also, the AUD has a bit of a spring in its step after trim confirmed AUD tariff exclusion, but this was signalled last Thursday, so the Aussie dollar remains more of the risk play driven by external factors

The Malaysian Ringgit

Ultimately this risk on the environment will benefit the MYR, and while local assets are cheering on the prospects of improving North Korea -US relations. Currently, the market is caught between a stronger USDJPY and buoyant regional equity market with suggested we will trade within recent ranges.

The regional markets will closely monitor the progress of President Trump and North Korean leader Kim Jong Un summit as most certainly an easing of tension will be a boost to regional sentiment.

Oil prices rose after the US Non-farm payroll while being buffeted by buoyant risk sentiment and remain mildly supportive for the Ringgit.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Stephen Innes

Stephen Innes

Head of Trading APAC at OANDA
Stephen has over 25 years of experience in the financial markets and currently based in Singapore as the Head of Trading Asia Pacific with OANDA. Stephen's market views focus on the movement of G-10 and ASEAN Currencies. His views appear in Bloomberg, CNBC.Reuters, New York Times WSJ and the Economist. His media appearances include Bloomberg TV & Radio, BBC International, Sky TV, Channel News Asia, ASTRO AWANI and BFM Malaysia. Stephen has an extensive trading experience in Spot and Forward FX, Currency and Interest Rate Futures, Money Market Derivatives and Precious Metals. Before joining OANDA, he worked with organisations like Nat West, Chemical Bank, Garvin Guy Butler, and Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario.
Stephen Innes