USD/CAD Crashes on Cool NFPs and Hot Canadian Labor
Daily FX Market Roundup Sept 6, 2019
Today’s non-farm payrolls report ended having very little impact on the US dollar. The greenback traded lower at the onset but recovered higher by the end of the NY session. According to the latest report, job growth slowed in August but average hourly earnings growth accelerated. Only 130K jobs were created, down from 159K but earnings grew at a 0.4% pace versus 0.3% in July. This was the strongest pace of wage growth in 6 months. Everything we heard from Federal Reserve officials suggests that they are reluctant to ease. This past week, FOMC voter Rosengren said “no immediate Fed action is needed if data stays on track.” FOMC voter Williams feels that the baseline for the economy is continuing strong growth and he won’t pre-judge the outcome of the September meeting. Fed President Kaplan agrees that it is important to continue assessing data ahead of FOMC before judging what type of action to take. This contrasts sharply with a market that believes a 25bp rate cut on September 18th is guaranteed. In fact, Fed fund futures are pricing in an 85% chance of a follow up move by December. All of this makes us increasingly worried that the market is misjudging the degree of Fed dovishness. A quarter point cut in September is not a done deal and even if they lower interest rates, the accompanying statement could be less dovish. This contrasts sharply with a market that believes a 25bp rate cut on September 18th is guaranteed. In fact, Fed fund futures are pricing in an 85% chance of a follow up move by December. All of this makes us increasingly worried that the market is misjudging the degree of Fed dovishness. A quarter point cut in September is not a done deal and even if they lower interest rates, the accompanying statement could be less dovish.
In contrast, Canada’s labor market is on fire. More than 81K jobs were created in August with a nice mix between full and part time work. This was the second strongest month of job growth this year and among the 3rd best month for the labor market in the past 5 years. Reports like this validate the central bank’s neutral outlook. At the last monetary policy meeting, the Bank of Canada said they feel the “current degree of monetary policy stimulus” is appropriate. While they recognize that the escalating trade conflict is affecting Canada’s economy, they also feel that the economy is close to potential and inflation is on target. Growth in the second quarter actually exceeded their forecast but the strength should be temporary. The housing market is recovering quickly thanks to low rates and wages have picked up. Eventually, easing may be needed because the BoC believes the economy will slow in the second half but after today’s jobs report, we know that near term easing is not necessary. Looking ahead, we look for further weakness in USD/CAD with a potential test of 1.31.
Meanwhile according to the latest economic reports, the UK economy is hurting from slower global growth and threat of Brexit. However none of that mattered this past week as Parliament took their strongest opposition to a no deal Brexit. A bill aimed at stopping Prime Minister Boris Johnson from sending the economy into economic chaos passed the House of Lords on Friday. It is widely expected to receive royal assent on Monday, which would turn it into law. Johnson’s request for a general election was also rejected as the Prime Minister suffered a crushing defeat in Parliament. Sterling traders applauded the outcome by driving the currency higher as this all but guarantees that Prime Minister Boris Johnson will be forced to delay Brexit. The opposition has put forth the Benn Bill, which would prompt Johnson to ask for an extension until Jan 2020, but Parliament needs to act before they are suspended in October. If approved, this bill also requires Mr. Johnson to write to the European Council. If they respond with a different date, the MPs will decide within 2 days to accept or reject that proposed date. UK labor market numbers are scheduled for release this week but they will continue to take a backseat to Brexit headlines.