Article / 05 August 2016 at 15:03 GMT

Gold medal day for NFP

FX Trade Strategist /
  • NFP gains should make believers out of rate doves
  • Canadian employment report weak but sketchy
  • Despite volatility, major FX rangers remain intact
Employment in the US (here a picture from New York) is going strong. Photo: iStock
By Michael O'Neill

The opening ceremony for the XXXl Olympiad in Rio de Janeiro hasn’t even started and already the US has scored a gold medal. Well, they would have if, employment reports were Olympic sports.

If trigger happy central bankers was another sport, the Bank of England’s Mark Carney, would also be in medal contention. The Bank of England managed to deliver a bigger package of stimulus measures then what analysts and traders had expected. If the goal was to devalue GBP to increase domestic prosperity, he got a head start. But despite Cable’s steep drop following the policy statement, GBPUSD remains well above its post-Brexit low and only slightly below the middle of the post-Brexit range.

Canada employment torched

Is it another case of “déjà vu? Statistics Canada recalled the August 2015 employment report due to an error in formulating the figures. That report showed a gain of a mere 200 jobs when the forecast was for as many as 20,000. 

The July 2016 Canadian employment report released on Friday, reported a whopping 31,200 decline in employment including a loss of 70,000 full-time jobs. 

That is ugly and made even more uglier when compared with the US nonfarm payrolls report which posted a stellar 255,000 gain. 

If the Canadian employment report wasn’t bad enough, Canada’s trade deficit widened in June ($3.63 billion deficit). The Bank of Canada is expecting an increase in exports to help drive Canada to 3.6% GDP growth in Q3. It is still “early days” but that growth target may be overly optimistic.

Canadian exports and imports going in opposite direction
Canadian Trade Data
Source: Statistics Canada

USDCAD looking bullish near top of the range

USDCAD started Friday looking like it wanted to break support at 1.3000 and head down toward the bottom of the May-July range. The US and Canadian employment reports now have traders looking at the top of the range (1.3260) and hanging a target on 1.3590 which is the 50% Fibonacci retracement level of the January-May 2016 range.

They may temper their enthusiasm when they check out a WTI oil chart. WTI has snapped the accelerated intraday decline from July 21st with the break back above $40.60 on Thursday which suggests some consolidation between $40.00/b and the downtrend line from June which sits at $43.30/b. The prospect higher oil prices may slow or limit USDCAD gains and keep the existing range intact.


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The week ahead

If there are going to be any Dog Days of Summer this year, next week is a prime candidate to kick off the festivities. There isn’t a whole lot of anything to get excited about except for the Reserve Bank of New Zealand interest rate decision. The strength of the domestic currency combined with the RBA rate cut points to a 25 bp. rate cut which is expected.  

The rest of the G10 data comes too soon after major policy announcements which should diminish their impact on FX markets. Still, one has to keep an eye out for the China data. It was a year ago this month that China’s equity markets collapsed sparking a stampede into risk aversion trades.

The week that was

It was billed as a big week for the Bank of England. It was going to be a Super Thursday that would truly be super and not a disappointment. It was and it didn’t.

Monday’s Asia session was fairly upbeat although volumes were reportedly light. China PMI data printed 50.6, handily beating the 48.7 forecast and AUD and NZD took flight. That move didn’t last in Europe. Falling oil prices capped the Aussie move and the antipodeans retreated.

EURUSD flat-lined while ignoring better than expect Eurozone PMI data. The New York session was quieter than usual with Canada closed for a holiday but that didn’t stop oil prices closing down more than 3%. US ISM and factory orders were soft.

Tuesday was a choppy day in FX markets. The Reserve Bank of Australia cut interest rates and AUDUSD dropped to 0.7488. Kiwi took advantage of the RBA rate cut and rallied. It didn’t last. The Aussie decline was completed reversed before lunch in London.

The weak US data on Monday fueled a USDJPY plunge from 102.84 to 100.68 by the end of day in New York. EURUSD gained but the move was not very impressive. GBPUSD continued the rally that started in Asia and climbed to 1.3362 from a low of 1.3168. 

A couple of Fed speakers, New York Fed President William Dudley, on Monday and Dallas Fed President, Robert Kaplan were recommending a cautious approach to US rate hikes which contributed to the US dollar’s malaise. Atlanta Fed President Dennis Lockhart’s comment that it was too soon to rule out a September rate hike was ignored.

Wednesday, the soft US dollar theme continued in Asia and oil prices were sliding. The Bank of Japan minutes confirmed a heated debate around the effectiveness of quantitative easing. For the most part, the G10 currencies were fairly stable during the European session. 

Canada is an oil dependent country. Photo: iStock
By the time New York finished for the day, the US dollar was slightly firmer helped by a stronger than expected ADP payrolls report. Oil rallied hard on a big draw down in gasoline inventories for the week. Chicago Fed President, Charles Evans proclaimed that “perhaps one rate increase could be appropriate this year”. Hardly a ringing endorsement for higher rates.

Thursday, was reasonably uneventful in Asia and in Europe. That changed with the Bank of England interest rate statement and press conference. The prevailing wisdom was that a 25 bp. rate cut was priced in, implying the risk was for a GBPUSD rally. Ooops! The surprise came in the form of two new stimulus measures and a sharply lowered 2017 GDP forecast. GBPUSD tanked. The day ended with the US dollar slightly lower against the G10 currencies except for sterling and traders eagerly awaiting Friday’s US employment report.

Friday, the US employment data delivered an upside surprise and the US dollar soared

— Edited by Clemens Bomsdorf

Michael O’Neill an FX consultant at IFXA Ltd. 


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