The US Dollar could not justify further gains after last Friday’s US December non-farm payrolls came softer-than-thought. The Aussie, on the flip side, has benefited from local fundamentals in what tends to be a particularly strong month for the currency. The Sterling remains under pressure as the BoE hints at lower rates. What else is going on you may wonder? Keep reading to find out…
After an impressive start of 2020, the USD was unable to keep attracting buy-side flows, with the US NFP not justifying the extension of that momentum. The headline employment figures came a tad below expectations even if the real catalyst keeping bulls at bay came in the form of wage pressure, lowest print since July 2018. The Aussie, on the contrary, drew the steadiest buy-side interest since the very start of the Asian session last Friday in response to an outsized upbeat reading in Australian retail sales. This time, the Kiwi was able to play catch up and managed to successfully piggy-back the momentum of its neighboring peer. But even amid USD weakness, other currencies such as the Pound or the Canadian Dollar didn’t capitalize on it, especially the Pound, with the selling tendency from Friday extending at the open of Asia today as interbank dealings were dominated by supply imbalances in response to the dovish remarks by Bank of England MPC member Vlieghe. The Yen continues to retain a clear bearish bias even if by analyzing the index, one must be aware that the evolving flows show volume tapering, with weakness led by momentum accounts vs real money. The EUR, as it’s been the case for some time, keeps showing dull movements with low vol the norm. Note, this week’s economic calendar is lighter than usual, dominated by second tier events.
Narratives In Financial Markets
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
NFP disappoints, USD sold: Last Friday’s US December non-farm payrolls came softer-than-thought at 145K vs 160K expected, with a slightly higher revision of the last read to 266K from 256K. The unemployment rate stood unchanged at 3.5% vs 3.5% expected as was the participation rate at 63.2%. The avg hourly earnings disappointed at +0.1% m/m vs +0.3% exp, with the yearly reading showing an avg hourly earnings of +2.9% y/y vs +3.1% exp, lowest since July 2018. As a result, the dominant flows ended up being USD negative.
US Manufacturing deep into recession: The component of employment in US manufacturing fell by 12k, which when combined with last week’s poor manufacturing ISM number, keeps validating the premise that the manufacturing sector in the US is deep in a recessionary phase due to the US tariffs, with no end in sight to get much better this year despite the phase 1 trade deal about to be signed up. As the team at NAB notes, thel U.S. National Bureau of Economic research (NBER) noted in a report that “U.S. companies and consumers are paying almost the full cost of U.S. tariffs, and the impact of those duties on import volume magnifies over time.” It said “the 2018 tariffs – many of which were applied in October – are only now having their full impact on U.S. import volumes”.
Canadian jobs up, wages down: The Canadian employment report for December surpassed expectations by coming at 35.2K vs 25.0K estimate, a much better result that November’s disastrous -71.2K print. The full-time employment change was 38.4 K vs -38.4 K last month, while the part-time employment change came at -3.2 K vs -32.8 K last month/ The unemployment rate improved to 5.6% vs 5.8% estimate and 5.9% last month. The hourly wage rate for permanent employees YoY dropped to 3.8% vs 4.2% estimate, which is a marked decline from last month’s 4.4%.
Reports of another attack in Iraq: Over the weekend, there have been reports of four people wounded in a rocket attack on a base in Iraq. It is thought that US military personnel were housed at the Balad air base,. However, so far, the reported wounded appear to be Iraqi soldiers, with no word on any US casualties. There is no official claim as to who conducted the attack. Markets will be in high alert to any further escalation between Iran and the US, even if the base case by the US is that Iran aims to stand down from further retaliatory offensive against US targets.
Pound under the cosh to start the week: We’ve seen sell-side pressure on the Pound during interbank trading after weekend comments by Bank of England MPC member Vlieghe, who said he is ready to cut interest rates if data does not improve. The policy-maker detailed that “personally I think it’s been a close call, therefore it doesn’t take much data to swing it one way or the other and the next few [MPC] meetings are absolutely live. I really need to see an imminent and significant improvement in the UK data to justify waiting a little bit longer.” The FT describes Vlieghe as a member with a solid track record to have provided early hint in policy direction. Back in Sept 2017, a hawkish speech by him was the precursor to the first BoE rate rise for a decade, materialized 2 months later.
US threatens Iraq if military forced out of the country: Amid pressure from the Iraqui government for the US to abandon military operations in the Middle East country, the US is reportedly threatening Iraq with the seize of the central bank accounts in the NY Fed if the army is forced out of the country. Iraq’s care-taker government voted last week to expel US troops fighting ISIS since 2014 after the killing of the Iraqui general Soleimani. According to the WSJ, “an adviser to the prime minister, Abd al-Hassanein al-Hanein, said that while the threat of sanctions was a concern, he did not expect the U.S. to go through with it. If the U.S. does that, it will lose Iraq forever,” he said.
Iran admits human error caused plane accident: In what should be barely any surprise, Iran has finally Iran admitted that it accidentally shot down the Ukrainian airliner that killed all passengers last week. The Iranian military says that it. The statement by the Iranian military said that the plane “took the flying posture and altitude of an enemy target”, hopefully providing some closure to the heart-broken families. The news ignited further protests against the Tehran government by their own people, while the international community, including France, the UK and Germany have issued a statement strengthening the rhetoric towards their commitment to monitor that Iran sticks to the 2015 nuclear deal and urging to reverse all measures that violate it and are noncompliant.
AUD boosted by retail sales & seasonals: The AUD was the standout performer last Friday. The initial buy-side pressure emerged off a strong 0.9% retail sales number in November, far better than the market consensus (0.4%), in what represented the largest increase since November 2017. A look at the details revealed that clothing, department store and household goods sales drive the overall increase, with the Bureau of Statistics noting an exceptionally high boost to sales from Black Friday sales. Despite the upbeat data, judging by the pricing of rates, the February RBA meeting is live, with next week’s December employment report a key data point to impact the prospect of a cut.
This week’s economic calendar is lighter than usual: Events in the calendar will be mostly second tier, with the exception of some US and Chinese data, even if unlikely to act as anything else other than a brief spell of fast price fluctuations. In China, we get December activity readings and Q4 GDP, while in the US retail sales and CPI are due. In Europe, the ECB will release its latest minutes, expected to cause little volatility. Besides, be reminded that on Jan 15, the US and China are scheduled to sign the Phase 1 trade deal.