On day one of her congressional testimony Janet Yellen said very little that was new to the Senate Banking Committee. The Federal Reserve chief cited ongoing slack in the U.S. jobs market as a concern and she put the emphasis back on the data ‘dots’ with one of her comments of +1% rates at the end 2015. It’s not necessarily new information, but the fact that she explicitly stated a time the market saw it is somewhat meaningful. The Fed chair was initially viewed as ‘dovish,’ but the market then noted some small changes in the language she used. The new message makes it clear that if the nonfarm payrolls data is maintained at +230k, it could force the Fed’s hand, hence, its timeline to raise interest rates. At this pace, within nine months U.S. unemployment could be at +5.3% to 5.5%. The labor market strength will be the influencer and all the forex market requires is “rate divergence” for volatility to return.
If nothing else, yesterday’s testimony caused the various asset classes to move — immediate reaction had equities on the back foot; bond yields backing up, higher yields supporting the dollar, and gold trading under pressure from ‘no’ inflation. It’s quite a mouthful to chew, but it stirred some much needed pockets of volatility that the forex market so dearly misses.
U.K. Labor Red Hot
On Governor Mark Carney’s watch, the U.K. has produced another set of strong labor results with the British claimant count measure down -36k in June. That puts the unemployment rate for March to May at +6.5% for forward-guidance historians and it’s the lowest it has been in six years.
And yet, troubling questions abound over the quality of jobs being created on the British Isles. Though the majority of job growth is full-time, wage growth continues to weaken; however, the slack in wage growth is what will probably make Carney’s job a tad easier from an earlier rate-hike perspective. The U.K. is not the only Group of 10 economy faced with this problem; in fact it seems endemic among the developed economies despite all that money. U.K. wage growth is up only +0.7%, year-over-year. The bulk of growth is coming from the total number of hours worked (+1.4% March-June versus December-February). Now it’s up to the fixed-income dealers to battle it out on when they think the Bank of England will begin to tighten. Is a strengthening U.K. labor market strong enough to convince Carney and company to start tightening as early as this November? It’s an early favorite among a few and reason enough for the market to want to own GBP on dips outright (support £1.7075). It’s also why EUR/GBP is looking to tackle €0.7900 for the first time in nearly two years.
Eurozone Trade with Russia Declines
The eurozone’s May trade surplus with the rest of the world has increased year-over-year (+€15.4B versus +€14.3B or exports +0.6% while imports are at +0.5%). But Eurostat’s latest trade data also showed the currency bloc’s trade with Russia has fallen sharply in the face of the Ukraine crisis.
On one hand, the pickup in exports is very positive news for the eurozone’s economy, especially since European Union policymakers are relying heavily on trade to wiggle their way out of their economic mess. With high unemployment, low-wage growth, and heavy-handed austerity measures in place, European businesses require foreign trade to break the cycle. The problem for many of the eurozone member nations is that they rely heavily on trade deals with Russia, and since the Ukraine crisis erupted, the dynamics have changed and have not necessarily wholly filtered through to many of the peripheries. For January to April, Russian exports are down -13%, year-over-year. However, the conflict in Ukraine is not the sole factor weighing on trade. The decline appeared before European-Russian tension ratcheted up and well before any sanctions were imposed on Russia.
Looking at it from Russia’s perspective, the decline can be attributed to the sharp slowdown of the Russian economy since last year. Nonetheless, it was Germany that warned only last week its economic growth rate slowed in the second quarter because of the Ukraine-Russia conflict, and the eurozone cannot afford for the German economy to backpedal — it’s their workhorse. For the European Central Bank (ECB), it has been relying on modest growth this year but the reality is, despite the worst of the economic slump supposedly over, the first quarter saw a marked slowdown from the fourth quarter of 2013. With hopes for a significant rebound in the second quarter fading fast, where is the ECB at now?
The 18-member single unit has remained locked with its two big-figure range it has held since mid-May. The key outright support for the pair still remains the €1.3503 post-ECB low in June and the €1.3477 January low. Any move below those levels is very much expected to ignite some significant downside momentum for the fundamentalists and techies.
Chinese Economic Growth Fails to Inspire
Overnight, China’s second-quarter gross domestic product and June industrial production data topped expectations (+7.5% and +9.2%, respectively). However, investors are less certain about China’s fragile economic recovery without another aggressive round of stimulus beyond the current targeted measures, thus their appetite for risk is dented. Investors have been leaning specifically on the Kiwi (NZD$0.8700), Aussie (AUD$0.9348), S&P 500 futures, and Chinese equities, causing them all to fall modestly post-data. Global risk is certainly unnerved and rather precarious after such a long healthy run. Investors continue to seek conviction.
Canuck Rate Announcement Due
Loonie bulls have been side-swiped ever since Canada’s dismal jobs report last week showed the Canadian economy shed nearly 10,000 jobs in June, in turn pushing the national unemployment rate up to 7.1%. Will it be déjà vu after the Bank of Canada’s rate announcement this morning? The bank is expected to keep rates on hold at +1% with activity data on the weaker side and no sign of inflation expectations on the rise. But how strong will Governor Stephen Poloz’s rhetoric be? What’s needed to push the loonie lower and through the psychological $1.0850 with conviction? With CAD short positions much lighter after last Friday’s clean out, it should have cleared the way for a significant threat higher for USD/CAD with the governor’s dovish stance. The first line of defense remains at $1.0795-00 — the market will continue to favor picking up USD on pullbacks.