ISM, ADP Saps Carry Trade, NZ Jobs, Aussie Sales Next

The carry trade unwound Wednesday after a drop in the April ISM non-manufacturing index and ADPs jobs data. New Zealand employment and Australian retail sales are coming up after sizable declines in NZD and AUD.

The NZD lagged Wednesday followed by AUD and CAD. The yen was the market leader in a classic, risk-driven carry trade unwind. The fears ebbed in the latter half of the US session but were sparked by: 1) the ISM non-manufacturing falling to 52.8 (exp: 57.5) from 57.3 2) ADP employment falling to 179K (exp: 200K) from 207K 3) oil falling 2%.

Digging deeper, the fall in the ISM service sector reading was driven by a decline in new orders (to 52.7 from 64.1) with all the main sub-indexes falling. The employment component is one of the best forecasting tools for predicting NFP and it slid to 51.9 from 53.7. The consensus for Fridays NFP number is a modest +183K but the market has started to price in something close to +160K. The prices paid component declined for the second consecutive month, weighing on Fed tightening speculation and USD/JPY.

Fed's Rosengren said opened the door for QE3 when he said NOTHING WAS OFF THE TABLE" as far extra measures to stimulate the economy. The Feds Fisher (voter) re-iterated that he will be at the forefront of calling for policy tightening but noted that higher resource prices have not translated into general inflation. He warned that his gut (which was 180-degrees wrong prior to the crisis) says the Fed cant be complacent on inflation.

New San Francisco Fed President Williams (voter in 2012) sounded as dovish as his predecessor, Janet Yellen. He said inflation will peak but then turn lower. He also fretted about recent lackluster eco data and the drag from gas prices.

Metals took another fall with silver dropping 7.5% to $39.38. All kinds of stories are swirling about battles in the silver futures market. Gold also fell $24 to $1516. Copper, which is one of the better gauges of global growth, fell 12 cents to $4.12 and rests just above Mondays lows.

Asia-Pacific Preview

Japan remains on holiday but New Zealand and Australia will fill the void with NZ employment and AU retail sales. New Zealands unemployment rate is expected at 6.7% vs. 6.8% prior and the quarterly employment change is expected at +0.6% vs. -0.5%. These figures are only released every three months and have a large impact on NZD (often more than 100 pips). Nothing has gone right in the New Zealand economy since the Christchurch earthquake but expectations are relatively modest here (esp. for the unemployment rate). NZD/USD has fallen 200 pips since Mondays three-year high (spot at 0.7889). A fall below todays low of 0.7866 points to a re-test of the late-April low of 0.7821.

AUSTRALIAN RETAIL SALES are expected to rise 0.5%-0.6% after climbing 0.5% in March. AUD/USD has been falling since the RBA held rates and remained dovish on Tues. The pair closed at session lows Thursday (spot at 1.0723) and uptrend support from the Mar. 15 low has given way.

By AB - AshrafLaidi.com Staff