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• Soft US jobs figures undermine equities and the AUD.
• Local economy holds strong.
• Obama legislation is risk to “prop desks”.

The Australian dollar is currently being led around like a bad dancer, as weak economic data in the US has prompted lower growth forecasts there and the potential for further disinflation. On Friday the all-important Non Farm Payrolls figure was worse than expected at 431K, however of real note was that a large proportion (390K) of the jobs added were tied to the public sector. The Payrolls figure came after a weak ADP Employment Change and high Initial Jobless Claims and Continuing Jobless Claims figures and the equity markets were punished as a result. Yesterday, Federal Reserve Chairman Ben Bernanke noted that the unemployment rate would be “high for a while” and highlighted that growth prospects in the States were “moderate-paced” leaving the prospect of tightening monetary policy equally restrained. The comments were well received by equity markets and the AUD pushed higher from last Friday’s losses because they reiterate that the US recovery will continue and that the interest rate differential will remain wide for an extended period of time.

The local economy is in stark contrast to that of other developed countries, however local economic data was mixed last week. We had a Trade Balance Surplus recorded for the first time since May 2009 on the back of stronger commodity prices while ANZ Job Advertisements were also higher for the month of May. However, Westpac Consumer Confidence and NAB Business Confidence continued to track downwards. The Federal government is pushing ahead with the proposed super profits tax, however today Lindsay Tanner signalled that there may be negotiations with the resources sector. The growth in the local economy is why in the past week, heavy falls in the US have not been as closely correlated with the Australian dollar and suggest that there is resilience at these levels. The AUD is positive with a resilient economy locally and a moderate growth economy in the US, however any hiccups from China in either the direction of a growth slowdown or of asset bubbles forming does hold risk for the AUD.

There has been a mixed reaction by investors with regards to proposed changes by US lawmakers. The investor community is largely in support of increasing capital requirements for banks and in making standardised derivates exchange traded rather than OTC, however there is strong opposition to the proposed restriction to proprietary trading desks.  The separation of the prop trading desk has the objective of restricting the movement of capital from commercial banking operations to the speculative trading operations and the so called ‘Volcker rule’ would reduce the amount of capital used to speculate on asset movements.