Daily Market Brief 10 Apr 2017

Ambiguous Jobs Data Helps Dollar Higher

April 10th: Highlights

  • Fed. Comments point to tightening of monetary policy
  • Syria tensions drive Yen
  • Euro drifting ahead of French election

Employment Headline Misses Expectations

Friday’s eagerly awaited employment report in the U.S. turned out to be a mixed bag.

Headline non-farm payrolls missed expectations by some distance coming in at +98k against an expectation of +175k. February’s expectation was revised lower, but only by 7%.

Ordinarily this would have led to a selloff for the dollar. However, a continued general tightening of the labour market provided support. Hourly earnings were virtually unchanged but the overall employment rate fell to 4.5% from 4.7%.

The Bureau of Statistics which produces the report characterizes anything below 5% as “full employment”. Although, the whole dynamic of the data is shifting given the new definitions about what constitutes a “job”. The Whole “Uber derived gig economy” is proving difficult to comprehend since there is no clear definition of what constitutes a job.

The dollar rose to a three-week high against a basket of its major trading partner currencies, reaching 101.34 before dropping back a little to close at 101.23.

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Fed comments reinforce rate hike outlook

New York Fed. President William Dudley commented on expectations for further rate hikes. It was concerning dealers that once the Fed starts to wind in other supportive measures that the pace of rate hikes would slow.

Dudley acknowledged that the Fed would pause but only very temporarily. The Fed needs to shrink its balance sheet by $4.5tn. This is the amount of the extraordinary measures which saw the Central Bank buying up Government debt to pump greater liquidity into the market at the height of the fiscal crisis.

The flip side of this move was highlighted by another FOMC member. St. Louis Fed Chairman, James Bullard, a renowned dove on monetary policy gave a speech in Australia. He commented that the winding down of the balance sheet would cause the Fed to pause while “tighter money” takes effect.

Traders were happy to shrug this comment off given Bullard’s dovish stance. A positive attitude has pervaded the market since President Trumps decisive action over Syria.

Geopolitical risk see Yen Higher

One of the major factors driving the value of the Yen is risk aversion. The way in which the Syrian conflict has suddenly reignited has highlighted the number of conflicts taking place.

Russian backed Government forces fighting coalition backed rebels, Turkey fighting Kurds in the North, everyone fighting so called “Islamic State”. A conflict has quickly developed over Russian support for President Assad following the accusations that he used chemical weapons against his enemies last week. The U.S. response was swift and this has shown a decisive side to the President.

Both the Russian and American Administrations know the dangers of an upturn in hostilities and the dangers of an American offensive killing a Russian soldier or the other way around drives a genuine rear of escalation.

The JPY traded as low as 110.12 before bouncing due to general dollar strength closing the week at 111.09.

Macron and Le Pen gain ground

Given the events of the recent past, it is dangerous to predict anything in the political space. An upswing in nationalism/populism did not follow through in the Dutch election but France is different. The electorate tend to “throw the baby out with the bathwater” flipping from left to right and back again at every election!

Emmanuel Macron a banker turned businessman turned politician describes himself as neither left nor right. His pro-European, pro-Euro platform is gaining support. This is in direct conflict with the views of his main rival right-wing firebrand Marine le Pen who, if elected will take France out of the Euro immediately and hold a Frexit referendum.

These two should gain the highest number of votes in two weeks pushing them into the run-off in early May to determine the new President.

So far, reaction from the Euro has been muted but as the vote moves closer any change in the popular view could see the single currency move quickly and violently.

Following the fanfare and opening salvos in the Brexit negotiations, the “real work” has begun. The E.U. stance received support yesterday from Macron who presented his pro-EU credentials promising to be tough on the U.K. over the terms of the “divorce”.

This week’s events of note

  • Japan: Economic Activity Report – Similar to the PMI reports from U.S., U.K., and Europe, this report details expectation for economic activity and therefore inflation.

  • Australia: Business Confidence – A key indicator of economic sentiment. Australian interest rates have, according to the RBA, bottomed so an upturn in activity is vital for rates to return to “normality”.
  • U.K.: Retail Sales, Producer Prices and Consumer Price Index – The Holy Trinity! Monetary policy is driven by this data.
  • Eurozone: ZEW report on economic activity and industrial production – German growth continues to be the main driver but markets are looking for contributions from other countries.

  • China: Inflation – Chinese growth has been so rapid that inflation still runs at a rate unsustainable in other economies. Monetary policy is driven by a far wider range of data than in other, more developed economies.
  • U.K.: Employment – Reasonably stable below 5%. Any major change will call into question the MPC’s monetary policy statements.
  • Canada: Interest rate decision – Canada’s economy is hugely influenced by U.S. activity. A hawkish statement likely but no rate change.

  • Australia: Employment report – Last seen at 5.9%. The RBA is closely monitoring hiring activity to assess the need for a rate hike.
  • China: Trade report – As eagerly anticipated in Australia as China. Exports of raw materials are the single biggest driver of Australian economic activity.
  • U.S.: Producer Prices – The most accurate gauge of future inflation so keenly observed by the FOMC

  • Good Friday: Manufacturing data – Easter holidays. Very widely observed with several key markets closed.
  • U.S.: Inflation – The rigidity of the programme of economic releases means that one of the more important indicators for monetary policy falls on a day when most the market is closed! A headline inflation number close to 3% will likely draw comment from FOMC members as a precursor of a further rate hike.

Have a great day!

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.”