Dollar Heads Lower. Don’t be Fooled by Jobs Report
Daily FX Market Roundup October 4, 2019
Don’t be fooled by the September jobs report. The unemployment rate may have dropped to its lowest level in 50 years but the labor market is weakening and not improving. While the data suggests that the economy is at full employment, hence the moderation in job growth, the slowdown in the services and manufacturing poses a major risk to hiring in the months ahead. Only 136K jobs were created last month but the big problem is wages. On a monthly basis, wage growth stagnated and year over year, average hourly earnings fell to a 12 month low. The expansion is slowing and as a result the US dollar is falling. The only reason why we didn’t see a steeper decline is because it was a weak but not terrible report. The job market is still the strongest in decades, but there’s no question that it is in the midst of a slowdown.
The odds of a rate cut fell according to Fed fund futures, which are now pricing in a 73% chance of easing this month and 90% chance by December. Yesterday, traders saw an 85% chance of an October rate cut. We felt these odds were aggressive given the Fed’s outlook last month and we still feel the same way after the speech from Chairman Powell on Friday. He reiterated that the economy faces risks but also believes its in a good place overall. We don’t believe US policymakers share the market’s eagerness for easing and data over the next month will dictate whether the market or the Fed changes their views. The minutes from their last FOMC meeting will be released next week along with inflation numbers. The minutes should help the dollar but inflationary pressures remain low. Investors should keep an eye on trade headlines as well because on Friday President Trump said he sees “a very good chance of a trade deal with China.” Technically, USD/JPY is headed for 106 but positive trade headlines could shift the pair’s outlook easily.
Next week will also be an important one for sterling. October 11th is the deadline for the UK to deliver an acceptable proposal. Unfortunately it seems that UK Prime Minister Boris Johnson is moving further away from crafting an agreement with changes substantial enough for the EU to reopen negotiations. On Friday, Johnson sent over his final proposals, which included mild and not major concessions. Sterling traded in a tight range throughout the week against the US dollar and now hangs in the balance. Many believe the proposals will be rejected by the EU which could send the currency tumbling lower. Data last week was mixed with manufacturing PMI index rising but the services and construction index falling. However activity in all 3 sectors are contracting which underscores the weakness of the UK economy.
Euro traded higher against the US dollar four out of the last five trading days. A large part of the move had to do with weaker US data, the sell-off in the dollar and expectations for Fed easing. However the single currency had also become deeply oversold and a light EZ calendar meant that it was due for a recovery. With that said, the outlook for the region is dim especially after the US imposed fresh tariffs on the EU this week. Duties on Italian cheese, French wine, Spanish olives and British biscuits will increase to 25%. Retaliatory tariffs are expected and when they are announced will most likely drive the euro lower. Next week’s economic reports include Germany’s factory orders, industrial production and trade balance reports.
The Australian and New Zealand dollars also traded higher against the greenback this week but the Canadian dollar hit 1 month low. Although the Reserve Bank lowered interest rates for the third time this year, A$ benefitted from US dollar weakness, stronger manufacturing and services PMI and positive trade headlines. NZ$ followed A$ higher as there were no major New Zealand economic reports on the calendar. The loonie on the other hand failed to participate in the rally because of the extent of data weakness. Not only did GDP growth slow in July, but the IVEY PMI index dropped 11.9 points to its lowest level in nearly 3 years. The report showed manufacturing activity contracting for the first time since May 2016 due to significant declines in employment, inventories and supplier deliveries. This report will surely spark talk of a rate cut from the Bank of Canada making next week’s labor market report exceptionally important.