Trade Tensions and Strong US Employment Lift Dollar

The US dollar rose on Friday against all major pairs after a strong U.S. non farm payrolls (NFP) report was published. The US added 201,000 jobs, but more importantly hourly wages beat expectations in August coming in at 0.4 percent. The market has priced in a rate hike by the U.S. Federal Reserve when Federal Open Market Committee (FOMC) members meet on September 25–26. Next up in the economic calendar are the releases of US inflation and retail sales data.

Fundamentals back the rise of the US dollar, but its the jitters triggered by the escalation of a trade war between the US and China that has made the greenback a safe haven. Emerging and developed markets continue to suffer effects of risk aversion as uncertainty about the new round of US tariffs.

  • Bank of England (BoE) to hold rates on Thursday
  • European Central Bank (ECB) to keep tapering pace steady
  • US inflation and retail sales could boost USD

ECB to Keep Tapering Steady This Week

The EUR/USD lost 0.35 percent in the last five days. The single currency is trading at 1.1561 after the August NFP report delivered on all fronts. The pace in job gains continues even as the slack has been reduced. Wages in the US are showing signs of life, but haven’t created inflationary pressures. The Fed is expected to deliver its third interest rate hike this month. The CME FedWatch tool shows a 99.8 percent probability of a 25 basis points upward change to the Fed funds rate.

The probability of rate lift in December rose from 70.9 percent a day ago to 77.6 percent after the release of the US jobs report.

The European Central Bank (ECB) will publish its rate statement on Thursday, September 13. Little surprises are expected from the central bank as its set to wrap up its QE program by the end of 2018.

The press conference hosted by ECB President Mario Draghi will be the highlight as he is sure to make comments on the headwinds the European economy is facing. Trade and political tensions will get a mention. Investors will be listening in to find some clues about the possible first rate hike by the ECB, but Draghi has said that it could come after the summer of 2019.

Canadian Dollar Falls Dragged Down by Disappointing Jobs Report

The USD/CAD gained 1.01 percent in the first week of September. The currency pair is trading at 1.3173 after a tale of two reports put downward pressure on the loonie. The Canadian and US jobs reports were published on Friday at the same time. While the US economy added 201,000 and saw wage growth. The Canadian economy lost 51,600 jobs in August and the unemployment rate rose to 6 percent.

Canadian dollar weekly graph September 3, 2018

The Canadian dollar was on the back foot most of the week given the uncertain future of the US-Canada trade negotiations. The silver lining came on Thursday after Bank of Canada (BoC) Deputy Governor Carolyn Wilkins said that a breakdown in the US-Canada trade talks would not keep the central bank from raising interest rates.

The Bank of Canada held rates unchanged in September and with the disappointing August jobs report probabilities of an October rate hike are now below 60 percent.

Next week in the Canadian economic calendar looks thin, with the new house price index on Thursday being the highlight. US data will continue to dominate as inflation indicators will be published. The producer price index PPI on Wednesday, September 12 and the consumer price index (CPI) on Thursday.

Canadian officials said that a deal with the US to replace NAFTA would not be reached on Friday. The market remains optimistic about a deal being struck, but given the two sides remain apart on key issues it could take more time for negotiations to reach a productive outcome.

Crude Falls on Trade Tension and Demand Jitters

Oil prices closed the week 2.9 percent lower. West Texas Intermediate was trading at $68.11 on Friday. The escalation of trade war rhetoric and its potential reality are impacting global energy demand forecasts. The weekly US crude inventory release showed slowing demand in gasoline and distillates with the end of the driving season in sight.

The upcoming US sanctions on Iranian exports have kept crude prices stable, but after weather disruptions did not materialize this week the black stuff remains under pressure as the US dollar rises.

Gold Lower After Strong Jobs Report Boosts Dollar

Gold had a volatile week and ended up lower on a weekly basis. The. Yellow metal closed slightly above the $1,200 price level. A solid jobs report, with a gain of 201,000 jobs and strong wage growth validates the September rate hike that is already priced in, and puts a December rate hike firmly on the table.

Trade tensions continue to worry investors as the Trump administration is considering a third round of tariffs on Chinese imports. The duties could add up to $267 billion, and this is on top of the $200 billion that are being finalized in Washington.

White House Advisor Larry Kudlow said on Friday that the US is waiting to China to agree to specific issue before the process can move forward.

Economic indicators in the US back up two rate hikes this year putting pressure on gold prices awaiting inflation data during the week.

Peso Drops as NAFTA 2.0 Deal Remains Out of Sight

The USD/MXN rose during the week. The currency pair is trading at 19.3213 after the peso dropped following the publication of the NFP jobs report. Dollar fundamentals were strong this week with lagging and leading indicators pointing to a solid economy and validating two more rate hikes by the U.S. Federal Reserve.

Canadian officials said on Friday that a deal with the US would not be reached at the end of week. Both sides remain optimistic but negotiations will continue as they are apart on key issues.

The threat of more US tariffs on China put pressure on emerging markets and the peso is beginning to shed some of the protection gained by reaching a deal with the US.

Market events to watch this week:

Monday, September 10
4:30am GBP GDP m/m
4:30am GBP Manufacturing Production m/m
Tuesday, September 11
4:30am GBP Average Earnings Index 3m/y
Wednesday, September 12
8:30am USD PPI m/m
10:30am USD Crude Oil Inventories
9:30pm AUD Employment Change
Thursday, September 13
7:00am GBP MPC Official Bank Rate Votes
7:00am GBP Monetary Policy Summary
7:00am GBP Official Bank Rate
7:45am EUR Main Refinancing Rate
8:30am EUR ECB Press Conference
8:30am USD CPI m/m
8:30amUSD Core CPI m/m
Friday, September 14
6:00am GBP BOE Gov Carney Speaks
8:30am USD Core Retail Sales m/m
8:30am USD Retail Sales m/m

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

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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