(As written for My Paper on 8 May 2012. Click here to enlarge)
The proverbial sentence “Sell in May and Go Away” seems to be sweeping the currency market – at least for this week.
In the space of three days, two events have dominated the headlines for traders:
1) USA Jobs Report
On Friday, the US Labour of Statistics revealed that only 115K jobs were created in the month of April. This was much lower than the forecasted figure of 160K. The unemployment rate dropped from 8.2% to 8.1%, its lowest level since January 2009.
At first glance, this seems to suggest that job growth had indeed accelerated. However, the drop in the jobless rate was in fact due to the contraction in the labour market. This simply means that more and more Americans are falling out of the job search altogether.
A confirmation of this fact is seen on the website of the Bureau of Economic Analysis, which says “within current transfer receipts, government social benefits to persons for social security increased $6.8 billion, compared with an increase of $2.6 billion.”
After the Non-Farm Payrolls (NFP) report was released, the US dollar immediately weakened, but then reversed course and strengthened as a wave of risk aversion hit the markets. This caused the EUR/USD to drop close to 100 pips in just three hours.
As traders would expect, the low NFP number puts QE3 front and centre again, although job creation has to remain in the low 100K+ for the Federal Reserve to finally pull the trigger and inject more liquidity.
2) New President for France
Earlier yesterday morning, France ushered in its first Socialist President in 17 years, Francois Hollande. The EUR/USD immediately reacted, opening sharply lower with a gap of 52 pips.
This was a knee-jerk reaction from traders because of the uncertainties surrounding Hollande’s policies, although it was indeed his anti-austerity rhetoric which got him elected.
In his campaign, Hollande stated his intention to resist austerity championed by German Chancellor Angela Merkel and European Central Bank (ECB) President, Mario Draghi.
As it is, unemployment is at a 10-year high of 10% and the national debt has ballooned to 86% GDP, higher than Germany’s estimated figure of 78%. Under outgoing President Nicolas Sarkozy, France’s budget deficit has risen to 4.6% of GDP, one of the largest in the Euro area.
One of the biggest challenges he faces now is to build a solid relationship with Angela Merkel, who openly endorsed outgoing President Nicolas Sarkozy prior to the elections.
Top News This Week
Australia: Employment Change, Thursday, 10th May, 9.30am. I expect figures to come in at -4K (previous figure was +44K).
China: CPI y/y. Friday, 11th May, 9.30am. I expect figures to come in at 3.5% (previous figure was 3.6%).
Short AUD/USD at 1.0195
AUD/USD has been moving in a nice downtrend, clearing over 350 pips in one week. With bad employment data expected out of Australia and lower CPI data coming out of China, the bias is for us to go short.
On the Hourly chart, a Fibonacci Retracement is drawn on the swing high of 1.0473 and the swing low of 1.0110. The 23.6% retracement is identified at 1.0195. This is the level we will enter for a short.
A stop loss of 40 pips is located above the entry price and we will have two targets on this trade, exiting the final position at 1.0115.
Entry Price = 1.0195
Stop Loss = 1.0235
1st Profit = 1.0155
2nd Profit = 1.0115