Editor's note: FX Update and our EM FX Weekly will be taking a break for the next four weeks. We wish all of our readers an enjoyable summer.
By John J Hardy
The US dollar has struggled for several sessions as the market so far has been able to brush aside concerns linked to the trade war theme as US and Chinese tariffs go into effect today. Will the US jobs numbers later today prove sufficiently surprising to change the plot?
The Federal Open Market Committee minutes released late yesterday hardly merited any response from the market, which seems distracted by the trade wars theme. Judging from the widespread complacency across markets over the last few sessions, however, the market is far from panic mode and perhaps feels that the tariff threat keeps the risk of more aggressive Fed tightening at bay.
Indeed, in the minutes, many Fed members fretted about the flattening yield curve and the specific risks from tariffs even as the very strong economic data was noted. So the chief question ahead of today’s latest batch of US jobs and earnings numbers is whether these are so overwhelmingly strong that they overcome the market’s complacent view on Fed tightening. We have a hard time seeing data sufficiently weak over the coming monthly cycle or two to justify the current pricing of less than 50/50 probability that the Fed moves twice more this year.
The USD has traded weakest in recent sessions against the smaller G-10 currencies and against emerging market currencies, which generally bounce on any relief from a strong USD and as the Fed rate outlook and the long end of the US yield curve has gone very quiet.
The JPY is also weak as safe haven demand has dried up (and likely due to relief linked to JPY-funding of EM carry trades). Across a number of USD pairs, the US dollar has weakened to the brink of – or into – key pivot zones – whether 1.1700-50 in EURUSD, 0.7450-0.7500 in AUDUSD and the 1.3000-1.3050 area in USDCAD. So today’s data looks important for whether we end the week with the USD headed over the brink and setting up an extension of weakness, or whether a sufficiently strong data set to shock the USD back to life.
In the US June jobs numbers, we continue to look at the average hourly earnings series more than the payrolls change numbers, as one would expect the latter to begin declining anyway as theoretical maximum employment (at least for those looking for a job) nears. Average hourly earnings are expected at +0.3% MoM / +2.8% YoY. The participation rate drop has flattered the headline unemployment rate number over the last couple of months, and we see the unemployment rate as providing the least important signal unless it registers a steady 3.8% level or drop despite a higher participation rate due to very strong household survey payrolls growth.
Over the weekend, the market is focused on the UK Cabinet summit at May’s Chequers residence intended to produce a coherent Brexit strategy. The summit could result in cabinet resignations if May’s line is seen as too soft and eventually lead to a challenge of May’s leadership. Sterling is weaker on concerns linked to this story despite increasing odds of a Bank of England rate hike at the August meeting.
AUDUSD is rather typical of a number of USD pairs in having risen to pivotal levels ahead of today’s US jobs numbers. The 0.7450-0.7500 area needs to hold as resistance to keep the immediate prospects of more downside intact, although the trend channel arguably doesn’t fully come under pressure from the bulls until a bit higher still, depending on the timing of any eventual rally.
The G-10 rundown
USD – it seems we’ll need a jolt in risk off or a jolt in Fed expectations higher to get this USD back in a rally stance. More complacency and no shift in Fed expectations might extend the USD weakness for another week or more until the next key test for the USD over Fed chief Powell’s testimony on July 17-18 (although the US CPI has risen to post-global financial crisis highs at the core (2.3% is expected and has been the high since 2008) and could prove interesting with next week’s Thursday release).
EUR – EURUSD seems to be itching for a further consolidation higher after refusing to follow up on the move lower post-ECB. A rally may be more about USD weakness than any decided euro strength here, and an extension higher on an indifferent US jobs report today may have modest ambitions.
JPY – the yen is more or less tracking the US dollar here as the rebound in risk appetite and EM’s fortunes keep the yen under pressure and the JPY’s fortunes may be largely linked to those of the US dollar if we continue to see a lack of volatility in the US yield curve.
GBP – sterling volatility could be set to pick up next week on the back of this UK cabinet summit, which could be an existential test of May’s government in the end. A weakened May could also mean a weakened sterling.
CHF – EURCHF is enjoying the positive mood and could rally further, though we don’t look for a full return to the higher trading range as long as Italy’s yield spreads remain elevated.
AUD – AUDUSD is at pivotal levels as noted above. The Australian equity index is ripping to new post-global financial crisis highs overnight – go figure.
CAD – USDCAD shares mirror-image similarities with AUDUSD and other USD pairs – looking pivotal near here, though the final capitulation zone for the rally not until 1.3000-1.3050.
NZD – NZDUSD trading up in the pivot zone that stretches to perhaps 0.6850. A powerful further surge here would be particularly disappointing for the bears after we recently broke a major range extending back more than two years.
SEK – the short end of the Swedish yield curve has adjusted several basis points higher in response to the Riksbank surprise earlier this week, but the return of complacency has also been instrumental in the SEK’s rally and is likely more important for setting the course from here.
NOK – EURNOK is looking much heavier now and possibly ready for a push towards 9.25 if markets don’t lurch back into risk-off mode. USDNOK is also interesting around its 200-day moving average and the round 8.000 level.
Upcoming Economic Calendar Highlights (all times GMT)
1230 – Canada May International Merchandise Trade
1230 – Canada Jun. Net Change in Employment / Unemployment Rate
1230 – US May Trade Balance
1230 – US Jun. Change in Nonfarm Payrolls
1230 – US Jun. Unemployment Rate
1230 – US Jun. Average Hourly Earnings
1400 – Canada Jun. Ivey PMI