07 July 2014 at 2:00 GMT-4
US employment figures surprised on the upside this Thursday with 288,000 new jobs created in June. The non-farm payrolls indicated the unemployment rate in America has fallen to 6.1 percent. Saxo’s Nick Beecroft says he’s struggling to find fault with the numbers or indeed Janet Yellen’s policies at the Fed. The Dow Jones index rose to 17,000 for the first time on the news. The dollar was also higher.
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Non-US data will drive dollar next week
FX Consultant / IFXA Ltd
• Major currencies drift within tight ranges
• ECB still carries big stick
• Loonie defies gravity
The USA is on holiday today (July 4) and it would appear that the rest of the world’s FX traders have followed suit. Volumes are reportedly lower across the board and the major currencies have drifted within tight ranges.
The week that was
It was a strange week and a short one, especially for Canadians, with Tuesday’s Canada Day holiday being rolled into an extended long weekend for many while the US July 4 celebrations drained liquidity and interest for overseas markets. It was also a week when only two of the major currencies made any headway against the US dollar. Sterling and the Canadian dollar gained while the rest of the majors declined, led by the Japanese yen.
The week started with month-end, quarter-end and half year-end repatriation and portfolio rebalancing flows churning FX markets. The US Justice Department also had a good start to the week by successfully taking USD 9.0 billion dollars from BNP Paribas by threatening exclusion from the US dollar clearing system.
Tuesday’s release of US factory orders and auto sales combined with Monday’s jump in Pending Home Sales information helped to support the "America is recovering" view and the US dollar.
Wednesday’s ADP employment data surpassed expectations with a 281,000 gain (forecast 205,000) and sparked a bit of demand for US dollars on anticipation of the same sort of result for the Nonfarm payrolls (NFP) release. The mild demand was not sustained after a speech by US Federal Reserve chairman Janet Yellen, who reiterated her perceived "doveish" bias.
Thursday had the real fireworks. The reaction to the highly-anticipated European Central Bank (ECB) interest rate decision and subsequent press conference was a bit of a dud, leaving the US NFP data to provide the pyrotechnics. The data didn’t disappoint. The 281,000 gain surpassed expectations and boosted predictions for a large rebound in US economic growth in the second half of this year.
The week that will be
The highlight for the week in terms of US data will be the minutes from the Federal Open Market Committee meeting in June, which will be released on Wednesday. The recent spate of better- than-expected US data, including Thursday’s NFP report, should lead to analysts scouring the minutes for any hawkish sentiment. The rest of the US data releases are second-tier at best, leaving European and Asian data to provide US dollar direction. There is a fair amount of Canadian data on tap including the Quarterly Bank of Canada Business Outlook Survey. The Canadian data will be key in determining whether the loonie’s rally from the March 1.1270 peak has run its course or if the strong support in the 1.0590-1.0630 zone is merely a pit stop. Positive Chinese trade data on Thursday could provide support to the commodity currency bloc and, combined with a possible rebound in the Australia employment data, put a floor on AUDUSD selling.
Mario Draghi is still keeping banks guessing over the ECB’s intentions. Photo: Sean Gallup / Getty
The ECB is walking softly but carrying a big stick
Mario Draghi stated that the key ECB interest rates will remain at their present levels for an extended period of time in view of the current outlook for inflation. Then in the next breath he started talking about Targeted Long Term Refinancing Operations (TLTROs). Simply put, LTROs will expand the ECB balance sheet while, at the same time, the FOMC is looking for ways to contract its own. A pessimist may conclude that if Draghi really believes that ECB interest rates aren’t going anywhere for an "extended period" he wouldn’t need the "big stick". The risk of further ECB stimulus action should limit EURUSD gains.
Loonie defies gravity
The Canadian dollar has fully recovered (and then some) from the post NFP sell-off and, in fact, is back probing the long-term US dollar support area, which is covering the 1.0590-1.0630 zone. The Canadian dollar is benefitting from bearish, short-term USDCAD technicals. Yesterday’s failure to extend gains above 1.0670 combined with the drop back below support in the 1.0640-50 area leaves 1.0590-1.0630 in the cross hairs. Moreover, the perceived diminished risk of lagging economic performance to the US, the improved inflation outlook and the perception that the Bank of Canada will be less doveish-sounding in its next statement have all contributed to Canadian dollar demand. But it is not all sunshine and unicorns. Moody’s announced that it was reducing Ontario’s outlook from stable to negative on rising debt. BMW selected Mexico over Ontario for a USD 1 billion dollar auto plant investment, putting another arrow into the heart of Canadian manufacturing. In addition, the Canadian dollar rally is running into stiff technical support in the 1.0590-1.0630 area, derived from the long-term uptrend on the weekly chart as well as previous USDCAD tops from 2013.
Chart: USDCAD weekly
Source: Saxo Bank