AUD/USD bulls come up for air but US Dollar shorts get pared-off

AUD/USD is trading at 0.6720 and has been stuck in a range of between 0.6676 and 0.6779 so far. The US Dollar has been firmer on Wednesday, recovering from two-month lows as investors lightened their short positions ahead of Friday´s US Nonfarm Payrolls and the Easter holidays.

The Greenback was initially offered at 101.415, DXY, after a second-straight report showed slowing employment growth in the United States. The combination of this week´s data and a report today that showed US private sector employers added 145,000 jobs in March, well under expectations for a rise of 210,000 is casting a dark cloud over the US Dollar. 

The ADP National Employment report showed US private employers hired fewer workers than expected in March, suggesting a cooling labor market. Private employment increased by 145,000 jobs last month, while economists polled by Reuters had forecast private employment increasing by 200,000.

The services industry was also shown to have slowed more than expected in March as the measure of prices paid by services businesses fell to the lowest in nearly three years. The ISM's Non-Manufacturing index dropped to 51.2 in March from 55.1 in February. The services sector's employment indicator sliding as well to 45.8 from 47.6 in February.

This data falls ahead of Friday´s US Nonfarm Payrolls report whereby traders who are in on Good Friday will be looking for any confirmation that the labor market is cooling, a major requisite in the Federal Reserve's fight to curb inflation. Particular attention will be paid to the Unemployment Rate in this regard. 

Analysts at Brown Brothers Harriman said the following with regard to the forthcoming jobs data:

´´The consensus for Nonfarm Payrolls this Friday stands at 240k vs. 311k in February, while the unemployment rate is seen steady at 3.6%.  Average hourly earnings are expected to slow to 4.3% y/y vs. 4.6% in February.  It's worth noting that the data will come on Good Friday.  With markets likely to be very thin, we could get some outsize movements from the numbers, whether good or bad. ´´

Meanwhile, the analysts at BBH noted that Cleveland Fed President Loretta Mester, a known hawk, said monetary policy needs to move “somewhat further into restrictive territory this year, with the fed funds rate moving above 5% and the real fed funds rate staying in positive territory for some time.”  She added that she was “very comfortable” with the Fed’s decision to hike rates 25 bp last month and that “So far that seems to have stabilized at the moment.” 

´´Yet Fed tightening expectations continue to fall,´´ the analysts said. ´´WIRP suggests around 55% odds of 25 bp hike at the May 2-3 meeting.  After that, it’s all about the cuts; 2-3 cuts by year-end are priced in.  In that regard, Powell said that Fed officials “just don’t see” any rate cuts this year. ´´

The analysts also pointed put that last week’s PCE data were mixed.  ´´While headline and core both came in a tick lower than expected, super core accelerated for a second straight month to 4.63% y/y and is the highest since October.  This is not the direction that the Fed desires and so we look for the hawkish tilt in Fed comments to continue,´´ the analysts argued. 

AUD could have last laugh

For the Aussie, MUFG currency analyst Lee Hardman said in a note that while the expectations are that the Reserve Bank of Australia, RBA, is close to or has ended its rate-rise cycle, negative for AUD, ´´it's partially offset by bets other G10 central banks are at similar points.´´He argues that ´´the AUD also remains driven more by the outlook for global growth, particularly for China's economy. Stronger growth in China as its economy continues to fully reopen this year supports our forecast for the Australian dollar to strengthen."