When we look back at this busy week nothing may matter more than news bombs and headline risk. Today, President Trump sent currencies and equities crashing lower by hitting China with an additional 10% tariff on $300B in Chinese imports starting next month. He said that while trade talks resumed and China promised to buy large amounts of agricultural products from the U.S., they “did not do so” nor did they “stop the sale of Fentanyl to the United States.” President Trump said trade talks are continuing but he’s playing hardball in the most dangerous way by slapping China with new tariffs. Beyond the sell-off in U.S. stocks, the U.S. and Australian dollars, there are a number of important consequences to Trump’s announcement. First and foremost, the chance for more easing by central banks including the Fed increased exponentially with the new tariffs. Everyone’s greatest concern has been global growth and trade tensions and now their worries have materialized. China will have to accelerate stimulus to prevent a bigger slowdown in their economy and as a result, the Chinese Yuan could breach the 7 yuan per dollar level. This will put pressure on currencies throughout Asia and undermine their growth. More losses are likely for equities and currencies as investors bet that the Fed is no longer one and done after this announcement.
Non-farm payrolls are scheduled for release on Friday and with the return of risk aversion, a weak report will have a bigger impact on the dollar than a strong one.Last month’s employment report was significantly better than expected as payrolls rose 224K against a 160K forecast. The uptick was largely a recovery from the prior month’s subdued levels. Job growth is expected to slow this month which may not have had a significant impact on the dollar if Trump did not roll out new tariffs on China because investors would fall back on the Fed’s optimism. However, the central bank may have no choice but to lower rates again if today’s sell-off turns into a deeper correction in the markets. As indicated by the list below, the arguments for and against stronger payrolls are even. So if job growth meets expectations, the dollar could continue to sell off. Support in USD/JPY is at 106.78 and we expect this level to be tested as long as payroll growth is less than 175K and average hourly earnings growth remains at 0.2%. However if job growth exceeds 200K and earnings growth accelerate, the greenback will rise but the rally should be short-lived.
Non-Farm Payrolls Outlook
Arguments for Stronger Payrolls
- ADPWealth Strength IndexADP is Extremely Up and trending Up rises to 156K from 112K
- Conference Board Consumer Confidence Index Hits 8 Month High
- University of Michigan Consumer Sentiment Index Rises Slightly
- 4 Week Average Jobless Claims Drops to 211K from 219K
Arguments for Weaker Payrolls
- Pullback from Last Month’s Strong Rise
- Employment Component of ISM Employment Drops
- Continuing Claims Rise Slightly
- Challenger Reports 43% Increase in Job Cuts
All 3 of the commodity currencies traded lower today but the Australian dollar was hit the hardest by the tariff headlines. AUD/USD fell for the 10th straight day to its lowest level this year. This is the longest period of uninterrupted weakness for the currency pair since 2008. The December low of .6745 is likely to be tested before next week’s Reserve Bank of Australia monetary policy announcement. Producer prices and retail sales are scheduled for release this evening and while stronger numbers are expected, good data is unlikely to stem the currency’s slide given the ramifications of slower Chinese growth on Australia’s economy.
While sterling sold off initially after the Bank of England’s monetary policy announcement, it bounced off its lows to end the day virtually unchanged against the greenback. The Bank of England voted unanimously to leave interest rates and their asset purchase program unchanged. They also lowered their GDP forecast for 2019 and 2020 but raised their inflation forecasts. Their projections do not include the possibility of no deal and is based on the central bank lowering interest rates 25bp by early 2020. According to the central bank, there’s a lot of uncertainty which could lead to a wide range of paths but if their forecast is met and a smooth Brexit occurs, that would mean gradual rate hikes. Governor Carney’s comments were not as upbeat as the Quarterly report or the monetary policy statement. He acknowledged that the chance of a no deal Brexit has risen, felt that financial conditions remain volatile and warned that trade tensions is having a larger than expected impact on the UK economy. As a result, underlying growth is now below potential with investment likely to fall further in the third quarter. Sterling came off its lows before the Chinese tariffs were announced because even with Carney’s comments, investors were encouraged that rate hikes are still on the table for the BoE.