Australia reports strong jobs numbers!

After finishing in second place last week the AUD was able to supplant the USD, as it failed to maintain its lead in the week after the exceptionally strong U.S. jobs report which had helped fan expectations of a December Fed rate hike. Similar to last week, it was the jobs report that helped power up the performance of the domestic currency. Australia recorded the largest payroll increase since early 2012 as the economy added 59K jobs in October, beating expectations of 15K and a -1K decline in September. The unemployment rate dropped to 5.9% from 6.2% a month ago, marking the lowest level since May 2014, while the participation rate picked up to 65% from 64.9% in the prior month. The internals were also stellar as both full-time and part-time jobs rose last month with the former gaining 40K (following September upwardly revised 10K decline) and the latter adding 19K (compared with September's 10K increase). Just to put these numbers into perspective, the 59K October jobs gain would equate to over 800K new jobs in the U.S.; and just last week the market was cheering about the 271K increase.

Surprisingly, the GBP was able to match the AUD’s gain after last week’s disastrous Super Thursday performance which was outlined in detail in last week’s Dispatch. The labor market also played a role in relation to the domestic currency 1.21% gain as the unemployment rate fell unexpectedly to a fresh seven-year low of 5.3%. Meanwhile, employment rose by 177,000 over the quarter, meaning there are now 31.2m people in work, according to the Office for National Statistics. Comments made by Bank of England Governor Mark Carney encouraged speculation that the central bank could move on interest rates sooner than previously suggested. Carney told Bloomberg he believes the U.K. economy, which is forecast to grow at 2.7% this year, may soon have the right conditions for a rate rise.

The odd person out last week belonged to the CAD with a weekly decline of 0.15%. The main culprit was the 8% drop in the price of crude as prices fell toward the $40 handle. The decline this week came from fresh signs of increasing supply due to abundant supplies and slackening demand, especially in China. The IEA said global oil-demand growth will slow to 1.2 million barrels a day in 2016, after surging to 1.8 million barrels a day this year, a five-year high. Having said this, Friday’s tragic terrorist attack on Paris could further slow the global economy and demand for oil. Thus, weakening oil prices may exert even more downside pressure on the CAD to start the week on top of key reports due this week on inflation and retail sales.

Last Thursday, no less than six Federal Reserve policy members spoke. We won’t bore you with the details of each speech – the common take away was that the Fed is ready to raise interest rate if the data supports the move.

IMF Will Decide the Near-Term Future of the Yuan

Most market analysts have little doubt the that Chinese yuan will one day be part of the International Monetary Fund’s special drawing rights (SDR) at some point in the future, but very few believe that it will happen by the end of this month. On November 30th the IMF Managing Director Christin Lagarde will make a decision about the CNY becoming part of the SDR, which is a multilateral institution basket of currencies that include the USD, EUR, GBP and JPY. However, if the IMF surprises us all, the inclusion of the CNY into the SDR could be the spark that fires the yuan rocket in the years ahead as a global reserve currency, likely replacing the Japanese yen and Great Britain pound in the currency hungry emerging market central banks.
It was only a few months ago that several media outlet reports suggested that people inside the IMF were saying that the yuan was not yet equipped for prime time. However, more recently Ms. Lagarde stated, “The IMF staff assessed that the RMB [CNY] meets the requirements to be a ‘freely usable’ currency and…proposes that the Executive Board determine the RMB to be included in the SDR basket as a fifth currency, along with the British pound, euro, Japanese yen, and the U.S. dollar.” She added that the staff also found that Chinese authorities have addressed “all remaining operational issues identified in an initial staff analysis submitted to the Executive Board in July. I support the staff’s findings.” This is big news.

The decision to include the CNY into the SDR will not rest entirely on Ms. Lagarde. The market at large will have a say as well. Meanwhile, China is busy building up its local bond market with the hope that it will be seen by Asian institutional investors, emerging market central banks and big sovereign wealth funds as a safe haven alternative to U.S. Treasury bonds at some point in the near future.

In August, the Peoples Bank of China (PBoC) allowed the CNY to trade within a wider band, which resulted in a weaker yuan. The result was furious push-back from Western economies because they felt that it was a protectionist measure to manipulate its currency in order to save its export
manufacturers at a time when the economy is growing slower than it has in years. However, it’s important to keep in mind that the yuan at the time was the strongest in the region – stronger than the likes of South Korea, Taiwan and the Singapore Dollar. Moreover, the trading band actually gave the market more say to sell the CNY short and weaken it against the USD and EUR. In its history, this is the closest China has come to free-float the CNY. China still has a long road ahead, but its goal to become a reserve currency has gain momentum. However, the PBoC’s strict control on the flow of the yuan will continue to impede its progress and restrict it from becoming a basket currency, as all other currencies in the IMF’s SDR are determined by the market.