The US dollar finds a bid in payrolls report
FX Consultant / IFXA Ltd
- Dollar sellers become buyers
- Has the US interest rate view changed?
- Mark Carney, Canada’s "gift" to the UK
By Michael O’Neill
The US employment report missed the forecast. Nonfarm payrolls posted a 151,000 job gain, well below the 190,000 forecast. At first blush it is weak but in the context of the December report (revised down to 262,000) and in light of the likely distortions due to the major snowstorm on January 23, the two-month average of 206,500 looks pretty healthy. The key part of this report was the rise to 0.5% in the average hourly earnings component. That has helped turn the US dollar from offered to bid. We will learn what Janet Yellen thinks of the data next Wednesday.
Canada is a different story
Canada lost 5,700 jobs in January after a gain of 22,800 in December. This report is notoriously volatile. The 4-month average is a mediocre 6,450 jobs, further evidence of Canada’s struggles to cope with the fall in oil prices. Elsewhere, the Merchandise Trade report provided a ray of sunshine. The trade deficit narrowed, led by a surge in exports.
Assuming that the weak Canadian dollar contributed to the rise in exports, this week’s sharp Canadian dollar rally, which recouped all of the January losses, may raise concerns at the Bank of Canada.
One of the reasons that the BoC stayed on hold in January was due to the steep spike in USDCAD. They wanted to avoid a disorderly Canadian dollar decline which would have occurred it rates were cut. They may be rethinking that concern now that USDCAD is at 1.3800 and not 1.4688.
USDCAD technical outlook
The intraday USDCAD technicals are bearish while trading below 1.3990 which represents the downtrend line from the January 20 peak. There is additional resistance at 1.3970 representing the 50% Fibonacci retracement of the November 30-January 20/16 range. The move below this level opened up the possibility of further USDCAD losses to 1.3590, the 76.4% level.
The intraday technicals are bullish while trading above 1.3740 supported by the move above 1.3800 which suggests further gains toward 1.3880.
Chart: USDCAD 4-hour with Fibonacci and intraday uptrend noted
Source: Saxo Bank. Create your own charts with SaxoTrader click here to learn more
Misdirection by Mark
Mark Carney’s arrival in the UK was greeted with fanfare usually reserved for rock stars. The boy wonder of central bankers had been aggressively recruited to become the first foreign governor in the history of the Bank of England, in part because he was credited with helping Canada avoid the worst of the 2008 financial crisis. That is like calling a lottery ticket winner a shrewd investor.
Canada was shielded from the worst of the 2008 meltdown because Paul Martin, Finance Minister from 1993 -2002 and Prime Minister 2003-2006, vetoed a couple of bank mergers (RBC and BMO, CIBC and TD) preventing them from getting into the same financial cesspool as their American counterparts. Forget too big to fail – they were too small to matter.
Now the UK has had the pleasure of 2½ years of Carney’s governorship. He no longer has rock-star status, its more of a garage band vibe.
Carney is a notorious flip-flopper. He could hold his own with a salmon on a sandbar. In 2013 he said that UK rates would rise when unemployment fell below 7%. Didn’t happen. Early last summer, he hinted at rate hikes by the end of the year. GBPUSD rallied and was flirting with 1.6000. By August he had changed his tune and sterling started to slide.
On Thursday, the Bank of England cut its forecasts for growth, wages and inflation. Normally, that’s a sign that interest rates may be heading lower. Not in Mark Carney’s UK. The Guardian reports that Carney started cautioning investors that interest rates were “more likely than not” to need to go up in the next two years.
Those comments are probably misdirection. A YOUGov poll suggests that 45% of Britons survey favour “Brexit” compared to 36% against. In addition to all the other global distractions (China, oil, US Fed), Brexit uncertainty helped drive GBPUSD down from 1.5500 in October to below 1.4100 in January.
It wouldn’t be too much of a stretch to believe that Carney opined about interest rate increases in order to introduce an element of two-way trading back into GBPUSD.
Source: Saxo Bank
The week that will be
Gong Hey Fat Choy. Happy Chinese New Year. FX liquidity will be at a premium in Asia all of next week. China ushers in “The Year of the Monkey” and markets take an extended holiday.
Monday will be even quieter because New Zealand celebrates Waitangi Day, commemorating the signing of the country’s founding document. FX markets should be moribund until Wednesday. That’s when Fed Chair, Janet Yellen emerges from hibernation and gives her Semiannual Monetary Policy Report to Congress.
Data wise, all the top tier stuff gets released on Friday including Eurozone GDP and US Retail Sales.
The week that was
It was a tumultuous week although that wasn’t very evident at the start of the week.
Monday’s expected fireworks from the release of the China PMI data (as forecast) failed to materialize forcing Asia traders into a futile search for inspiration elsewhere. The same held true in Europe, although GBPUSD was in demand early due to modestly strong data but couldn’t hold onto the gains. It changed in New York. A steady slide in oil prices and a doveish sounding speech by Fed vice chair Fischer had the dollar on the defensive throughout the day and made GBPUSD the best performing G-10 currency.
Tuesday, Asia saw a continuation of the dollar selling seen earlier in New York. The Reserve Bank of Australia left interest rates unchanged and delivered a relatively optimistic statement but that wasn’t enough to stem the tide of risk aversion sentiment. A spate of global PMIs were a tad on the soft side which undermined sentiment as did ongoing oil price slippage. The oil slide continued in New York resulting in the commodity currencies being the biggest losers against the US dollar in G-10 currencies. US equity indices were in the red and fixed income yields dropped. The risk aversion sentiment helped USDJPY break support in the 120.30 area.
Wednesday’s Asia session took the risk aversion hand-off from New York but it didn’t last. The Reserve Bank of New Zealand governor, Graeme Wheeler gave a hawkish sounding speech and the bounce in Kiwi helped shift the sentiment to a more positive outlook.
Meanwhile, the Bank of Japan’s Kuroda said that it is possible to cut negative rates further which failed to have an impact on USDJPY. Oil bounced off the lows in early European trading and put downward pressure on the US dollar. The downward dollar pressure exploded into a panic during the New York Day spurred by a weak ISM services PMI report. Adding fuel to the fire was New York Fed president Dudley. In an interview, he said that conditions had tightened since December. Traders concluded that all future US rate hikes were in doubt and the US dollar tanked.
Thursday’s Asia session was far calmer than the New York session that preceded it and the G-10 currencies (except USDJPY) traded in fairly narrow ranges. BoJ president Kuroda’s testimony to the Diet was dovish, but nothing new. The calm in Asia preceded a storm in Europe. Despite Mario Draghi reminding markets of his dovish intentions, he was ignored. The US dollar continued to be sold throughout the New York day, undermined by falling bond yields and weak economic data. The weak US dollar had an added benefit as it helped WTI prices rise.
The week ended with Friday’s US employment report and it rise in the hourly earnings component forcing traders to re-evaluate their dovish FOMC beliefs.
– Edited by Clare MacCarthy