FX Risk Aversion Intensifies with NFPs

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FX Risk Aversion Intensifies with NFPs

Daily FX Market Roundup 12.07.2018

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management

The last month of the year kicked off with a bang but not in the way that many of us would have hoped. Equity markets sold off across the globe and in the world of currencies, the U.S. and Australian dollars were the worst performers. A convergence of negative news pressed both currencies lower but most of the concerns centered on China, which is why AUD fell the hardest. The week started with optimism after President Trump and President Xi reached a trade truce but things went south quickly when the U.S. arrested Huawei’s CFO. Stocks crashed and President Trump tried to stem the slide by saying he had no knowledge of the arrest and that trade talks with China are going very well. Investors are skeptical and in a headline driven trading environment they are taking everything at face value. As we muddle through the conflicting headlines, what is clear is that uncertainty will remain in the weeks ahead as investors wait to see if the Huawei arrest really affects US-China trade talks. There’s also a big Brexit vote next week and the ECB meeting. Between these events and a continued focus on China, December will remain a jittery month for currencies.

The primary theme in the FX market right now is risk aversion, which can be both positive and negative for the U.S. dollar. When markets sell off globally, money usually flows into the U.S. dollar and the Japanese Yen. With stocks poised for further losses, demand for the yen has been and should remain strong. However demand for the U.S. dollar depends on what is happening in the other currency’s home country. The latest US jobs report is proof that despite the pickup in manufacturing and service sector activity the momentum in the US economy is slowing. Only 155K jobs were created in November versus a forecast for a 198K increase. Payroll growth in October was also revised slightly lower but the concern is wages. Not only did average hourly earnings growth fall short of expectations, rising only 0.2% compared to a forecast of 0.3% but the prior month’s reading was also revised lower to 0.1%. This means that companies are hiring fewer workers, paying them less than expected and allowing them to bill fewer houses. Considering that the labor market has been the main engine for U.S. growth, this month’s report has some major red flags. Another big problem is that hiring intentions will suffer from the past 2 months of market volatility. Fearing the possibility of further losses in share values, businesses will become more conservative about hiring which could lead to a downward spiral for the U.S. economy and the rest of the world.

While the new date for Fed Chair Powell’s Congressional testimony has not been set, the jobs report, the sell-off in US stocks and decline in Treasury yields tell us that investors expect the Fed to be less hawkish and USD/JPY to fall further.
In the lead up to the last FOMC meeting of 2018, next week’s inflation and retail sales report will be just as important as NFP but keep an eye on US-China headlines as they will also influence risk appetite. USD/JPY is at risk of testing 112 and possibly moving down to 111.50 if CPI or retail sales surprise to the downside.

While the Bank of Canada was less hawkish at the latest monetary policy meeting, Canada’s economy is on fire with a record breaking 94.1K jobs created in the month of November. This is the strongest single month of job growth since Statistics Canada started keeping records in 1976. As a result of this blockbuster increase, the unemployment rate dropped to 5.6%, a record as well. Almost all the jobs were full time with Alberta – the oil producing hub adding 23,700 workers despite falling oil prices. Bank of Canada Governor Stephen Poloz said there’s more room for non-inflationary growth and rates hikes will be data dependent but this employment report screams of the need for more tightening. OPEC also reached an agreement to cut production by 1.2 million barrels a day which should be enough to halt the slide and shift the momentum in crude prices. $50 was really the uncle point for OPEC nations who pressed Russia to come onboard despite earlier resistance. With no major Canadian economic reports scheduled for release next week, between the OPEC deal, the prospect of a further recovery in oil, weaker US jobs data and stronger Canadian employment, we have strong reasons to believe that the Canadian dollar hit a bottom.

Kathy Lien
Managing Director

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