Dollar Firmer Ahead of Jobs Week

Dollar higher after Fed comments and Tax Reform proposal

The USD rebounded against majors in the last week of September. Hawkish rhetoric from the U.S. Federal Reserve and the Trump administration tax reform proposal boosted greenback ahead of a busy week that will be wrapped up by the biggest indicator in the markets the U.S. non farm payrolls (NFP).

Geopolitics continue to play a big part in daily trading with the situation with North Korea still developing. The referendums in Catalunya and Northern Iraq could have direct impact on the EUR and the price of oil.

The U.S. non farm payrolls (NFP) will be published on Friday, October 6 at 8:30 am EDT. The US economy is anticipated to have gained less than 100,000 jobs due to the disruption caused by Hurricanes Harvey and Irma. The unemployment rate is forecasted to remain at 4.4 percent. Fed Chair Janet Yellen has continued to push for a gradual rate hike path despite stagnant consumer spending and low inflation which has increased the probabilities of a US benchmark rate hike in December.

The EUR/USD lost 0.992 percent in the last week. The single pair is trading at 1.1824 after US central bank comments and a strong tax reform push by the Trump administration turned around the decline of the USD. The referendum vote on Catalan independence is not a legal one, as Spanish courts did not approve, but the government risks radicalizing moderate and undecided voters if it tries to intervene. Given the results of the Brexit votes and the French and German elections had so big a stake in the future of the Eurozone, investors will be tracking the Catalunya vote this weekend.

Central bank divergence continues to be one of the main drivers of the pair. The Fed kept its main speakers on point arguing for another rate hike this year. The market is now pricing a higher than 70 percent chance of a December hike at the end of the Federal Open Market Committee (FOMC) meeting. By contract European Central Bank (ECB) President Mario Draghi is not ready to commit to removing stimulus and has pushed to October the details on tapering the EU’s QE program.

Employment data out of the US starting with the release of the ADP on Wednesday, October 4 at 8:15 am EDT, Unemployment claims on Thursday, October 5 at 8:30 am EDT and the NFP on Friday, October 6 at 8:30 am EDT will be big factors in a week that saw the USD record a positive week against the EUR. There will be little European data on display with US indicators and advances on the American tax reform efforts driving the dollar.

Canadian dollar weekly graph September 25, 2017

The USD/CAD gained 1.098 in the last week. The currency pair is trading at 1.2469 in a week that featured NAFTA negotiations, central bank speakers and US tax reform in the agenda. The pair touched weekly highs of 1.2533 on Thursday only for the CAD to regain some ground but still finish lower versus the USD in a weekly basis.

Governor Stephen Poloz said on Wednesday there is no predetermined path for theinterest rate and that the central bank would proceed with caution. The rhetoric was less hawkish than that seen in the summer. Unknowns are making estimating the appropriate rate path hard, but then again that has been the situation in all of 2017. The loonie has been one of the best performers this year after the two rate hikes, but has lost momentum after the Fed has signalled a third rate hike of the Fed funds rate while Poloz seems to be pumping the breaks. The comments from the BoC indicate a slower rate path that could see the central bank standing pat for the remainder of the year.

Canadian employment data will be released on Friday at 8:30 am EDT. Canadian employment has impressed with steady gains in the number of jobs. The 22,000 new jobs added last month were for the most part part-time positions. The economy is consistently losing full time positions and with the worries of the central bank about high household debt the CAD could be under pressure for the remainder of 2017.

Energy prices gained 2.018 in the last week. West Texas Intermediate is trading at 51.21 as the threat of supply disruption in Northern Iraq has increased the price of crude. Global demand has been forecasted to be higher, but so supply continues to create a glut. US oil production rose 9 percent during the last three weeks offsetting reports of stronger forecasted demand and a possible Organization of the Petroleum Exporting Countries (OPEC) cut agreement extension. Saudi Arabia used overproduction as a strategy to grab market share and drive prices lower with the intent to drive the US shale industry into bankruptcy. The strategy backfired as the flexibility of US drillers and low rates made it easier to service the debt and wait for the OPEC to reach an agreement with other major producers.

Oil traders continue to monitor the situation in Northern Iraq. Supply disruptions have been one factor driving prices up in the past. The referendum for independence for the Kurdish region in Iraq has not been recognized. Turkey and other allies of Iraq have threatened the oil-rich region with cutting off the access to international markets of their oil if they continue on this path. The potential impact to global supply would be of around 500,000 daily barrels.

Market events to watch this week:

Monday, October 2
4:30 am GBP Manufacturing PMI
10:00 am USD ISM Manufacturing PMI
11:30 pm AUD Cash Rate
11:30 pm AUD RBA Rate Statement
Tuesday, October 3
4:30 am GBP Construction PMI
Wednesday, October 4
4:30 am GBP Services PMI
8:15 am USD ADP Non-Farm Employment Change
10:00 am USD ISM Non-Manufacturing PMI
10:30 am USD Crude Oil Inventories
3:15pm USD Fed Chair Yellen Speaks
8:30 pm AUD Retail Sales m/m
8:30 pm AUD Trade Balance
Thursday, October 5
8:30 am CAD Trade Balance
8:30 am USD Unemployment Claims
Friday, October 6
8:30 am CAD Employment Change
8:30 am CAD Unemployment Rate
8:30 am USD Average Hourly Earnings m/m
8:30 am USD Non-Farm Employment Change
8:30 am USD Unemployment Rate

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza