Dollar Marks Time Ahead of US Jobs Report

<br /> Dollar Marks Time Ahead of US Jobs Report – Marc to Market<br />


The foreign exchange market is becalmed,
leaving the US dollar narrowly mixed.  
The euro has been confined
to less than a 20-pip range through the Asian session and most of the European
morning.  The news stream is light.  The US withdrawal from the Paris
Accord may have garnered the headlines, but as a market force, it is difficult
to detect the immediate impact.  
The UK reported stronger
than expected construction PMI. 
 Unlike the manufacturing PMI
reported earlier in the week, where the decline was not as much as anticipated,
the construction PMI rose outright.  The 56.0 reading is a new two-year
high and compares with April’s 53.1.  An interesting insight into this
smallest of the three surveys is that the
higher prices from sterling’s past depreciation appear
to be fading as input prices rose by their least in seven months.  
The economic news in the UK
is playing second fiddle to the politics. 
 More polls will be released over the weekend.  Net-net
since the election was called, the Tories
support in a poll of polls is little
changed.  The tightening of the polls seems to reflect a gain in Labour’s support at the expense of
the Lib Dems and UKIP.   Although we have pointed out developments in the
options market that show at least some
investors are buying downside protection, we remain surprised by the stability
of sterling.  At $1.2860, it is up 0.4% on the week.  It fell about
0.5% in the month of May.  
Sterling had been sold to
near $1.2770 in the middle of the week before recovering to post an outside up
 It has spent yesterday and today
within the mid-week range.  A break of the $1.2820-$1.2920 range could
spur a cent move.  Note the euro is flat against sterling this week. If
this is sustained, a five-week advancing
streak for the euro will have been snapped.
Stocks and bonds are firmer
 The S&P 500 and Dow Jones
Industrials finished yesterday at a record
high.  Asian equities followed suit.  The MSCI Asia Pacific Index
gained nearly 1%.  It was practically flat on the week coming into today.
 It is at its best level since 2015.  The Nikkei closed above 20k for
the first time since August 2015.   Korea’s Kospi is at new record highs
despite the elevated tensions on the
The Dow Jones Stoxx 600 is
up around 0.6%.  It too was practically unchanged on the week as of yesterday. 
  Financials and consumer
discretionary are leading the move higher.  Only the energy sector is off.
 The index gapped slightly higher at the open and is near its best level
in two weeks.  It is up 9% year-to-date.  
Benchmark 10-year yields are
1-2 bp softer throughout most of Europe.
  The yield on the 10-year JGB and US
Treasuries are fractionally lower.  At 2.21%, the US 10-year yield is off
3.5 bp on the week, while the German Bund is flat at 29 bp.  The UK yield
backed up four basis points this week and
is essentially matched by the Italian
benchmark, where the chances of a fall election have weighed on sentiment.
The decline in oil prices
this week has been a talking point. 
 Both Brent and WTI are off around 2%
today, bringing the loss on the week toward 4.8%.  It is the biggest loss
in four weeks.  Although US inventories continue to fall (eighth week),
the output is rising.  US output
rose another 22k barrel a day in the most
recent week.  It is the 14th weekly increase in the past 15 weeks.
 Libyan and Nigerian output increased last month, which is not including in the OPEC output caps, by estimated 315k barrels a day.  
After relative strong gains
this week, the Chinese yuan weakened ahead of the weekend.
  We suggested that yesterday’s
loss in the offshore yuan, which had led this week’s move, spurred at least in
part by the liquidity squeeze in Hong Kong, may have been an indication of
waning demand.  The offshore yuan
(CNH) is off by about 0.6% today, while the onshore yuan (CNY) was off 0.1%.
The US employment report is
the economic highlight.
  Although the non-farm payroll report
is notoriously hard to forecast consistently accurate, the inputs to forecasts
like the weekly jobless claims, ADP, withholding taxes, and the ISM all suggest
a reasonably strong report.  The median forecast in the Bloomberg survey
is for the 182k increase.  We
suspect the risk is asymmetrically tilted
to a stronger rather than a weaker report.   
Given the three-month
decline in the core PCE deflator, and comments by some Fed officials, including
Governor Brainard, investors may be particularly sensitive to the average
hourly earnings component of the jobs report. 
 A downside disappointment from the
0.2% expected increase could buoy the bond market and weigh on the dollar.
Ahead of the US jobs data,
the market has discounted a near certainty that the Fed will raise interest
rates on June 14. 
 The Bloomberg estimate puts the odds
just below 93%, and the CME model puts it
a little more than 91%.  Our work suggests a fair value for the June Fed Funds contract o a 25 bp hike is about
98.96 (1.04%) while the contract is at 98.9725.
The euro has not been below
$1.12 since early Wednesday.
  It is
not above $1.1260 either. The week’s range is rough $1.1160-$1.1260.  Options struck at $1.12 (537 mln
euros) and $1.13 (1.1 bln euros) roll-off today.    Next week’s ECB
meeting looms large.  It is widely expected
that the forward guidance is tweaked, adjusting the risk assessment, and
acknowledging that rate has bottomed.
 The staff may revise its growth forecast higher, but there is a risk that
its inflation forecasts are shaved.
The dollar had fallen
against the yen for four sessions before yesterday
when the gained 0.5%. 
 It is seeing a marginal extension of
those gains today and recorded the week’s high today near JPY111.70 The
JPY111.20 offers support.  A move, and ideally a close, above last week’s
high near JPY112.15, would lift the
technical tone. 
The Australian dollar
has underperformed this week, losing almost 1% before stabilizing today. 
  It is consolidating at near yesterday’s lows, after
losing 0.7%.  The lack of follow through selling is notable given that one
of the narratives, weak industrial metal prices, remains intact.  Copper,
nickel, lead, zinc and iron ore prices are all lower today.  Meanwhile, the US dollar is extending its
advancing streak against the Canadian dollar to a fifth session.  At
CAD1.3545, it has retraced 38.2% of May’s decline.  The 50% retracement target is near CAD1.36.  Its April trade figures that will be reported today will be overshadowed by the
US jobs report.  

Dollar Marks Time Ahead of US Jobs Report
Dollar Marks Time Ahead of US Jobs Report

Reviewed by Marc Chandler

June 02, 2017

Rating: 5

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