The G19 + USA non-event
Weekend G20 headlines had no impact on Foreign Exchange markets this morning as the overall language reads very familiar. The great divide between G-19 and the USA remains climate control and trade with President trump winning minor concessions on steel concerns.The US has argued unfair steel dumping practices are hurting US jobs. But with the market opening at or near Friday’s closing prices, G20 is being viewed as a non-event by market participants.
Currency movements are remarkably placid in early trade as dealers continue to digest Friday’s Non-Farm Payroll data. While there was an uptick in USD volatility after a weaker than expected Average Hourly wages, with many focusing on wage numbers, the overall report was not particularly USD negative with stronger jobs, positive revisions and a higher participation rate. Hence the sudden USD sell off was followed by the rapid knee-jerk higher.While the wages component does little to increase the September rate hike probability, the positive growth narrative does extend the length of the rate hike cycle.
The weaker wage growth buys the Fed more time to wait for inflation signals to pick up before increasing rates which supports the current market view of balance sheet announcement in September followed by a rate hike in December. With no change in the sentiment, the dollar is trading neutral in early Asia and equities remain bubbly. Ultimately the Goldilocks NFP is a win-win for the US dollar and global equities; the headline keeps US rate hike expectations on track while the lower inflation print suggests a slower pace of normalisation.
Given the growing decouple between wages and the employment data I suspect the markets will begin to view the CPI more impactful on Fed policy rather than the job prints as we move through the second half of 2017. So look for this weeks USD CPI print to be heavily scrutinised by traders
The Loonie was the market showstopper as Friday’s Canadian payrolls data came in above market expectation.The Canadian Dollar has quickly cleared the last impediment to an all but guaranteed rate hike this week. Well, as guaranteed as one can be in the Forex Markets. But the potent combination of data and Governor Poloz’ interview just before the blackout week, has traders all aboard this rate hike bus.
With the market banking on end to Central Banks perpetual money printing machines and as s markets yield to this adversity, a surprising pivot by BoJ has policy divergence between the US and Japan back to the fore The BoJ caught traders leaning the wrong way last week after conducting aggressive bond buying operations. It’s hard not to remain constructive on the USDJPY given the divergence narrative, and we could see the USDJPY push higher early this week.
It’s a quiet week on the EU data front, but the move to normalisation is more than just a Fed story. The EURO will continue to move in sympathy with the selloff in EUR fixed income.And given we’re in the early stages of this EU bond move, the market is positioning long Euro. Last week’s ECB minutes were very bearish for bonds, even after the Draghi hawkish tilt the week prior. The key within the ECB minutes was the bank’s discussion around removing the pledge to increase bond purchases. It’s now a case of when and not if.
While the RBA is likely a long way from walking the path of interest rate normalisation, the Aussie should catch a ride on the broader US dollar weakness, so dip demand remains. But the US interest rate trajectory continues to be the primary driver, and with the Feds likely in no rush to raise rates given the tepid inflation outlook, this should feed well into global risk sentiment wich could filter into the Aussie dollar near term. But the ultimate risk for the Australian currency remains the US yield curve