Daily Market Brief – 6 Feb 2017

Wages growth slows Rate Hike expectations

February 6th: Highlights

  • Headline employment data buoyant
  • Recent ranges set to persist
  • “One size fits all” not working for Eurozone
– In the Sunday Times newspaper yesterday there was a report that City economists are frantically raising their estimates for U.K. growth in the wake of the Bank of England’s more optimistic Inflation Report.

Economists need sharper pencils!

Despite major volatility since the start of the year, currency values have remained in relatively narrow ranges driven by contrasting factors. In the U.S., Trump’s abandonment of the “strong dollar” policy is offset by the FED’s rate tightening cycle. In the U.K. Brexit fears are counterbalanced by the Bank of England’s more optimistic reports on growth and inflation.

On Friday the monthly employment report was released in the U.S. The headline data was appreciably stronger than expected by economists who were looking for 175k new jobs to be created in January. The actual number was 226k, almost 30% higher! This is a report that is constantly adjusted and the previous two releases were revised lower each by around 20%.

Wage growth was lower than expected and coupled with the revisions which saw the unemployment rate rise from 4.6% to 4.8%, the likelihood of a hike in rates next month dropped a little.

As the Fed waits to see the detail of what Trump intends to do to create growth and jobs, it is impossible to predict with any certainty the path of rates.

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Sterling fall not a one way call

Sterling’s sharp fall against the U.S. dollar and euro since June’s Brexit vote has so far hurt almost as many exporters as it has aided, the British Chambers of Commerce said on Monday.

Whilst it is accepted logic that a fall in the value of the currency is good for exporters the overall effect on U.K. manufacturing has been mixed.

Many smaller businesses invoice overseas customers in sterling but paid for some of their raw materials in foreign currency, leaving them exposed to the costs of sterling’s fall unless they put up prices.

The effect of the boost to U.K. exporters from the fall in the pound has yet to feed through into the U.K. economy whereas the inflationary impact is more instant. This could be a major factor behind the upgraded growth expectations from the Bank of England last week.

Weaker Euro not a universal benefit for EU

The long-established “one size fits all” mantra in Europe continues to drive a wedge between various member states and their ability to growth their economies.

In the weaker countries like Greece, the currency is overvalued by around 7% given their need to export more to grow out of recession. In Germany, however, the currency is undervalued by around 15%. And that is the dilemma facing ECB President, Mario Draghi.

A report issued over the weekend said that “German exporters remain the beneficiaries of a system that is causing stagnation and unemployment in the rest of Europe.” America has become the top destination for German exports (they love a Mercedes) for the first time since 1961.

The growth that is being seen in the U.S. economy is one reason but given the Euro has fallen by nearly as much as sterling, albeit over a longer period, the attractiveness of EU goods has never been greater.

German Finance Minister Wolfgang Scheuble said on Friday that it is in Germany’s interests for the Euro to be a “little stronger”. You could almost feel the collective shudder from the rest of the Eurozone.

Germany has a constant worry over inflation. Hyperinflation was nearly 100 years ago. I think it’s time they consigned that notion to the rubbish bin of history!

Quiet week for data releases.

It is never wise to predict how busy the FX market will be over a given week as it has an almost endless capacity to surprise.

The U.S. trade balance for January is reported tomorrow. It is pointless to try to predict the number other than to say that last month saw a $45.2 billion deficit.

Given President Trumps tirade last week about trade and currency manipulation, this report is probably going to start to have greater significance in the calendar.

Layer this week, there is an extraordinary meeting of EU heads of Government in Malta where they will discuss actions and plans to solve current problems that may affect the Union.

As we have not, as yet, seen an “official” response to the various actions that have taken place in Parliament, it is likely the usual rhetoric about the deal “not being better than membership” and “single market and free movement being inextricably linked” will be trotted out.

The fact remains that until both sides gather around a table, no one really has any idea what is going to transpire.

This week’s events of note

  • Nothing of note – Weekend press often dominates

  • Australian Rate decision – No Change expected
  • U.S. Trade Date – May excite Trump to “bash” currency manipulators
  • U.K. House Prices – A useful gauge of economic sentiment

  • New Zealand Rate decision – No Change expected

  • German Trade Data – The only EU member with a surplus. See Trump comment above!

  • EU Extraordinary Summit – Brexit anyone?
  • U.K. Manufacturing data – Growth still being seen (From a very low base)

Have a great day!

Author Alan Hill Currency Analyst
About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”


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