Better than expected reports on Australian GDP and Chinese manufacturing gave a predictable lift to the Australian dollar against the USD. But the reports also helped the euro reach its best level in nearly two weeks of trading. Why?

Aussie GDP grew by 1.2% in the April to June period from the previous three months, when it rose a revised 0.7 %. Much of the increase was attributed to China’s insatiable demand for coal and iron ore. Overall exports gained by 5.6%, adding 1.1 percentage points to overall GDP. Amazingly, real gross domestic income rose 4.0%, the largest quarterly growth since March 1973. Real net national disposable income increased by 5.1% in the quarter and by 9.5% over the past four.

Australia is incredibly productive as well; Unit labor costs in real terms decreased by 0.2%, and indication that inflation will stay relatively muted.

In China, The Purchasing Managers’ Index rose to 51.7 from 51.2. July’s reading had been the weakest since February 2009. All in all, the number is an indication that manufacturing in China may have reached its lowest point and is due to increase in coming months.

So, why did all this news from the other side of the world affect EUR/USD?

The reason lays with the reports effects on S&P futures, which are a reliable guide for movement in EUR/USD. S&P futures, like the spot FX market, moves throughout the day (except between 5pm and 6pm ET). The euro moves with S&P futures just as it moves with the actual S&P 500 during its trading hours in NY, and these reports helped S&P futures to a gain of just over 1% in overnight markets.

I’m writing this article about two hours before the Institute for Supply Management’s report on manufacturing, which is due out at 10am ET. Should that report print worse than economists’ expectations (53.2) you can expect to see things reverse very quickly, i.e. the euro and Australian dollar will fall against the USD as the S&P 500 retreats (assuming an absence of unexpected positive news). But look especially at the employment index within the report; should that slide for a second month you might really see traders become even more risk-averse than they generally are.

Things will probably reverse very quickly on Friday when the Bureau of Labor Statistics (BLS) reports on the August job numbers. Expect to see the report show a gain or actual loss of private sector jobs of 10,000 either way. The reason I say this is because of the report on weekly unemployment claims which came out on August 19, which showed that there were 500,000 new claims.

The BLS report is the result of a survey that is taken over a one week period and in August, that week coincided with the August 19th report on unemployment claims. As it happens, that reading was the worst in many weeks and had risen from a low of 438,00, which means the trend in new private sector jobs has to be moving lower.

Therefore, I suspect that new private sector jobs will grow by 10,000 or so, at best, and that an outright loss of about 10,000 is well within the realm of possibility. What’s interesting is how the market might react.

Because Mr. Bernanke conditioned the Fed’s response to a lack of employment growth “regardless of the risks of deflation,” we could see the dollar weaken dramatically should these numbers prove to be correct. Why? Because the market could assume that a weak report on jobs will lead to another round of “electronic printing” by the Federal Reserve.

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