Market Drivers August 8, 2016

CNY Trade Balance Better
GE Industrial Production in line
Nikkei 2.44% Dax 0.96%
Oil $42/bbl
Gold $1336/oz.

Europe and Asia:
CNY Trade Balance 52.3B vs. 48B
EUR GE IP 0.8% vs. 0.8%
EUR Sentix 4.2 vs. 3.6

North America:
CAD Building Permits 08:30
USD Labor Market Conditions 10:00

Dollar was mildly bid against the yen climbing above the 102 level in Asian and early European sessions as traders in those regions adjusted their positions in the wake of much better than anticipated NFP data last Friday.

Friday’s payroll numbers were much better than expected beating not only on the headline basis of 225K versus 180K eyed but also on the important Average Hourly Earnings component which rose 0.3% versus 0.2% eyed. Overall the labor data was unambiguously bullish and sets the possibility that the Fed could seriously consider a rate hike as early as September.

There are still two primary arguments against a hike so soon. First, the Fed is very likely going to want to wait until the US election passes before making any policy changes. Although Fed officials are adamant about being non-political in their considerations we believe they are loathe to insert themselves into the middle of what is turning out to be the most partisan election in decades and will most likely stand down til December. The second reason is more subtle. In an environment in which all the other major trading partners are furiously easing their policy, the Fed may be reluctant to move the other way even if the fundamentals require it, for fear of tightening global credit and strengthening the dollar too quickly. Because of the buck’s unique status as a reserve currency the Fed’s actions have ramifications well beyond the shores of Atlantic and the Pacific.

Still the Fed is eager to avoid the ZIRP trap and would very much like to begin normalising policy so we believe the most likely scenario is that FOMC officials will send a clear signal at the September meeting that they will hike rates in December. The key to that thesis is the quality of US data over the next few weeks. If it proves supportive, starting with the Retail Sales this Friday the USD/JPY rally should continue and the pair could climb towards the 104.00 figure as the week proceeds.

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