As the US dollar finished last year, so too did it begin the New Year,
and after extending its losses, the bears have paused.
Technical factors had been stretched, but it appears to have been old-fashioned
macroeconomic considerations to have helped the dollar to move off the
mat.
Quickly summarized, these considerations are a larger than expected
Australian trade deficit, slippage in Japan’s service sector PMI, a larger than
expected drop in the UK’s BRC price index, and the lack of improvement in the
flash eurozone December core CPI. The US dollar is firmer
against all the major currencies. That said, it is more likely sideways
in its trough than a bounce, and is wholly unimpressive for bull and bear
alike.
To signal something of importance, we suspect the euro would need to
finish the week below $1.20 and sterling below $1.35. The dollar held
support near JPY112 at the start of the week and has steadily moved
higher. It has now approached a downtrend line drawn off the high in
early November near JPY114.75 and the high from H2 December near
JPY113.65. It is found today around JPY113.30.
The employment reports for the US and Canada are the last points of
interest ahead of the weekend. Canada. Canada jobs growth has
been impressive. It has averaged 41.6k jobs a month over the last
three-months, compared with the average for 2016 of 19k and the 2017 average
through November of 31k. A subdued report is expected. The
Bloomberg survey median of 2k would be the smallest increase since November 2016.
Separately, Canada will also report it merchandise trade balance (November) at
the same time as the employment report. The Ivey PMI is reported ninety
minutes later.
The US has created more than 200k jobs in three of the past four months
through November. Part of the rise in October and November were
related to the storm-induced problems in September, when the world’s largest
economy created 38k net new jobs. The three-month average of 170k
matches the year-to-date average of 174k. Economists are still looking
for 180k-200k. There are few inputs for the report and none point
to any deterioration.
The market will focus on earnings, though a tick lower in the
unemployment rate to 4.0% would surprise. Due to the base effect,
average hourly earnings must rise by at least 0.3%, otherwise the
year-over-year rate will slip from November’s 2.5% pace. Any
disappointment will likely quickly be transmitted to the dollar through the
interest rate market, but will unlikely deter expectations for a March Fed hike.
It appears that a little more than an 80% chance has been discounted after the
FOMC minutes compared with about 69% at the end of 2017.
The US will also report the November trade balance, the ISM
non-manufacturing survey and factory and durable goods.
The key assessment of the US economy is unlikely to change. The pace of
growth has increased in recent quarters and still appears running near a 3%
quarterly annualized pace. Regardless of how one sees the medium and
longer-term consequences of the tax changes, most seem to agree it will help
boost growth in the near-term (as in this year).
The US trade deficit is deteriorating more than it may appear as
the dramatic improvement in the energy balance is concealing the worsening of
the non-oil trade balance. It is something that we suspect will
be increasingly in the news this month as several trade issues comes to a head
and NAFTA and US-South Korea talks resume.
Global equities have begun the New Year with impressive rallies.
The MSCI Asia Pacific Index extended its record high by another 0.5%
today. If one doesn’t count New Year’s Day and Boxing Day, this benchmark
has not fallen since December 21. It rose 3% this past week, the most
since July. European bourses are also in rally mode.
German, Italian, and Spanish markets are also up more than 3% this week, while
the Dow Jones Stoxx 600 is up 1.8%. Today’s 0.6% rise is broad
based with all sectors participating. Health care, consumer discretion,
and utilities are leading the way. US shares are trading
higher in Europe, and barring a significant surprise with the employment data,
the S&P 500 is ready to build on its 1.9% gain this week coming into
today.
In contrast, the bond markets are quiet with core10-year yields flat,
while European peripheral yields slip, as did Asian yields.
Commodities are consolidating this week’s advance.