After rising for most of the week, the greenback’s rally lost momentum on Friday on the back of mixed labor market data. Although the USD extended its gains versus the commodity currencies, it slipped against the Japanese Yen, euro and sterling. Friday’s jobs report fell short of expectations with the US economy adding the fewest jobs in 6 months but this was largely due to Hurricane Florence, which put 299K people out of work. The details of the report weren’t nearly as bad with the unemployment rate falling to a 48 year low and job growth for August revised up by 69K. The only bad news was earnings, which maintained a steady 0.3% pace of growth in September. The prior number was revised slightly lower but as that figure was the strongest in more than a year the modest adjustment followed by steady growth is not worrisome. Service sector activity is very strong so job growth should recover in October. For all of these reasons, we continue to believe that the dollar is a buy on dips particularly against the Japanese Yen. The relative strength of the U.S. economy and the Federal Reserve’s resolve to tighten monetary policy is unquestionable. Federal Reserve Presidents are worried about inflation accelerating and next week’s economic reports should reinforce their concerns. With oil prices at their highest levels since 2014, we think there’s a very good chance that CPI and PPI will surprise to the upside, renewing the dollar’s rally. In fact, investors are starting to consider the possibility of 3 instead of 2 interest rate hikes next year and while the dollar is down, 10 year Treasury yields continue to make new 11 year highs.
Meanwhile USD/CAD shrugged off higher Canadian bond yields and oil prices to trade above 1.2950 as this week’s economic reports cast doubt on a rate hike later this month. The trade balance turned positive in August but manufacturing activity slowed significantly in September. Also the jobs report was released on Friday and while Canada reported the highest amount of job growth this year and a better unemployment rate investors are worried that the labor market is being sustained primarily by part time work. Weaker average hourly earnings growth also raised concerns for consumer spending going forward. Looking ahead, next week’s housing market reports shouldn’t have a significant impact on the currency as investors take their cue from the market’s appetite for U.S. dollars. Technically USD/CAD could extend to 1.3000 before there’s any meaningful resistance.
The worst performing currencies today were the Australian and New Zealand dollars. As we mentioned earlier this week, economic underperformance is the main reason why AUD and NZD fail to see any rally this week. The selling pressure for both currencies are strong and there could be another cent decline before there’s support in either currency. Data from Australia hasn’t been terrible with retail sales rising more than expected, the trade surplus growing and service sector activity expanding. However the recent mortgage rate hikes are starting to have a significant impact on housing and investors are worried that it will only be a matter of time before the US – China trade war (which hasn’t improved at all) catches up to these economies. Therefore next week’s business and consumer confidence reports may not help AUD. New Zealand’s economy on the other hand is truly underperforming with dairy prices continuing to fall and job ads slipping. We expect next week’s business PMI reports to reinforce the weakness. The most market moving piece of data for both countries could be China’s trade balance and more specifically their import activity.
Sterling on the other hand was the best performing currency. Investors have not given up on the hope for a Brexit deal and their optimism was reinforced by EU Chief Negotiator Barnier’s comment that they are prepared to offer the UK a “super charged” free trade deal that is more comprehensive than any agreement offered before. Unfortunately this means they will be rejecting Prime Minister May’s demand for frictionless trade so the Brits may not happy with the deal. At the Tory Conference last week, May made it clear that the UK is still willing to leave the EU with no deal than a bad one so if she feels that the offer falls short, Brexit negotiations could break down again. Barnier is scheduled to formally present the proposal on Wednesday after which we’ll probably get a response from the UK. The Irish border is still an unresolved issue – the UK hopes to present a solution in the coming week and we’ll see how the EU responds.