Edit
A week ago, after nine Fed officials had spoken, the market widely
expected Yellen and Fischer to confirm that the table was set for a rate hike later this month. They did,
and the dollar and US interest rates fell. Now, after a strong ADP jobs
report (298k), everyone recognizes upside risk to today’s national report, and the
dollar has lost its upside momentum against most major currencies, but the
Japanese yen.
expected Yellen and Fischer to confirm that the table was set for a rate hike later this month. They did,
and the dollar and US interest rates fell. Now, after a strong ADP jobs
report (298k), everyone recognizes upside risk to today’s national report, and the
dollar has lost its upside momentum against most major currencies, but the
Japanese yen.
Many seem to
recognize the risks of long dollar
positions today. There are three sets of possibilities.
First, the US jobs report is seen
as strong, and the dollar sells off, as last week on buy the rumor sell the
fact activity. Second, the jobs report could be strong, and the market
sees the pace of Fed tightening accelerating, and the dollar rallies.
Third, the jobs report could be disappointing,
and the dollar sells off. In two of the three scenarios the dollar
weakens.
recognize the risks of long dollar
positions today. There are three sets of possibilities.
First, the US jobs report is seen
as strong, and the dollar sells off, as last week on buy the rumor sell the
fact activity. Second, the jobs report could be strong, and the market
sees the pace of Fed tightening accelerating, and the dollar rallies.
Third, the jobs report could be disappointing,
and the dollar sells off. In two of the three scenarios the dollar
weakens.
On the other
hand, what is different now compared with last week is that the dollar is
softer before the event. The US dollar’s momentum stalled
yesterday, helped by a bout of euro short covering that helped trigger a
broader short-covering advance in many of the major currencies. The spark
came from the ECB’s Draghi, who made it clear that the central bank’s risk
assessment was shifting toward a more balanced view as the downside risks
eased. Nevertheless, the fact that the staff’s forecast that inflation
next year will be lower than this year warns against over-emphasizing a subtle
change in signaling.
hand, what is different now compared with last week is that the dollar is
softer before the event. The US dollar’s momentum stalled
yesterday, helped by a bout of euro short covering that helped trigger a
broader short-covering advance in many of the major currencies. The spark
came from the ECB’s Draghi, who made it clear that the central bank’s risk
assessment was shifting toward a more balanced view as the downside risks
eased. Nevertheless, the fact that the staff’s forecast that inflation
next year will be lower than this year warns against over-emphasizing a subtle
change in signaling.
Most
participants did not expect another rate cut from the ECB. Most did not expect a new long-term loan facility,
especially given that the current ones are still open. Although Draghi
said that asset purchases could be accelerated
if needed, investors recognize that a gradual winding down is more likely than
a fresh expansion. With the
negative deposit rate of 40 bp, there is some thought that the ECB could reduce
the negativity before completely ending is asset purchase program. But this does not appear particularly likely
in the next several months, and, moreover, it may look a bit different if
inflation peaks, as we expect, in Q2.
participants did not expect another rate cut from the ECB. Most did not expect a new long-term loan facility,
especially given that the current ones are still open. Although Draghi
said that asset purchases could be accelerated
if needed, investors recognize that a gradual winding down is more likely than
a fresh expansion. With the
negative deposit rate of 40 bp, there is some thought that the ECB could reduce
the negativity before completely ending is asset purchase program. But this does not appear particularly likely
in the next several months, and, moreover, it may look a bit different if
inflation peaks, as we expect, in Q2.
While we
recognize the dollar has scope to weaken a bit more, we suspect it will not be
a repeat of next week. Those that want to pick a near-term
dollar top may be reluctant to make much of stand when it may be easier after
next week’s FOMC meeting. This view still can see the euro moving toward
$1.0640-$1.0680, and sterling testing the $1.22 area. The Australian
dollar can push toward $0.7545-$0.7560, while the US dollar can ease back to the CAD1.3430-CAD1.3450 area.
Such price action would leave the technical tone intact.
recognize the dollar has scope to weaken a bit more, we suspect it will not be
a repeat of next week. Those that want to pick a near-term
dollar top may be reluctant to make much of stand when it may be easier after
next week’s FOMC meeting. This view still can see the euro moving toward
$1.0640-$1.0680, and sterling testing the $1.22 area. The Australian
dollar can push toward $0.7545-$0.7560, while the US dollar can ease back to the CAD1.3430-CAD1.3450 area.
Such price action would leave the technical tone intact.
At stake today
is also the nine-day drop in US 10-year Treasury prices, which pushed the yield
back to 2.62%, the highest since the Fed hiked in mid-December. The nine-day move saw the yield rise by 30 basis
points. The yield is slightly lower now. If there were a single factor to explain why the dollar
is above JPY115, making a two-month high, we would suggest it is the rise in US
yields, which drives the 10-year interest rate differential. The dollar
has not closed above JPY115 since January 11.
is also the nine-day drop in US 10-year Treasury prices, which pushed the yield
back to 2.62%, the highest since the Fed hiked in mid-December. The nine-day move saw the yield rise by 30 basis
points. The yield is slightly lower now. If there were a single factor to explain why the dollar
is above JPY115, making a two-month high, we would suggest it is the rise in US
yields, which drives the 10-year interest rate differential. The dollar
has not closed above JPY115 since January 11.
There is large option expires today at JPY115 (~$1.3
bln) and JPY116 (~$1.3 bln). We note that the January 19 high was set near JPY115.60 and the 61.8% of the
dollar’s decline since the early January high is a touch below JPY116.
The dollar’s advance has also lifted it through a trendline drawn from
the highs beginning at the JPY115.60 area. That trendline, which some see
as the top of a larger wedge, comes in now near JPY114.60, which corresponds
with the 38.2% retracement of the dollar’s leg up since the mid-week low near
JPY113.60.
bln) and JPY116 (~$1.3 bln). We note that the January 19 high was set near JPY115.60 and the 61.8% of the
dollar’s decline since the early January high is a touch below JPY116.
The dollar’s advance has also lifted it through a trendline drawn from
the highs beginning at the JPY115.60 area. That trendline, which some see
as the top of a larger wedge, comes in now near JPY114.60, which corresponds
with the 38.2% retracement of the dollar’s leg up since the mid-week low near
JPY113.60.
Both the UK and
France reported disappointing January manufacturing data. In France, manufacturing output fell 1.0%. The
market expected an increase of around 0.5%. And the December series was
revised to show a 1.0% decline rather than a 0.8% fall. The broader
measure of industrial output fell 0.3% compared with expectations of a 0.5%
gain.
France reported disappointing January manufacturing data. In France, manufacturing output fell 1.0%. The
market expected an increase of around 0.5%. And the December series was
revised to show a 1.0% decline rather than a 0.8% fall. The broader
measure of industrial output fell 0.3% compared with expectations of a 0.5%
gain.
In the UK,
manufacturing output fell 0.9%, which was a little more than the market
expected. A
pullback had been expected after the
heady rise in December which was revised
to 2.2% from 2.1%. Headline industrial output fell 0.4%, a tad less than
the market expected. Construction spending also disappointed. It
fell 0.4% in January; twice the loss the median forecast anticipated but also follows a strong December
gain (1.8%). Lastly, helped by the
1.6% rise in exports and a smaller 0.9% rise in imports, the UK reported a
GBP1.966 bln trade deficit. The median expectation in the Bloomberg
survey was for a GBP3.1 bln shortfall after GBP2.026 bln deficit in December
(which was initially reported as a
GBP3.304 bln deficit).
manufacturing output fell 0.9%, which was a little more than the market
expected. A
pullback had been expected after the
heady rise in December which was revised
to 2.2% from 2.1%. Headline industrial output fell 0.4%, a tad less than
the market expected. Construction spending also disappointed. It
fell 0.4% in January; twice the loss the median forecast anticipated but also follows a strong December
gain (1.8%). Lastly, helped by the
1.6% rise in exports and a smaller 0.9% rise in imports, the UK reported a
GBP1.966 bln trade deficit. The median expectation in the Bloomberg
survey was for a GBP3.1 bln shortfall after GBP2.026 bln deficit in December
(which was initially reported as a
GBP3.304 bln deficit).
Canada also reports February jobs data. The market looks for some mean reversion after two
months of more than 45k job gains. In the past two months, Canada has
grown A small decline is expected by the median
forecast. It has grown 86k net new full-time
jobs. Given that Canada is roughly one-tenth
the size of the US, that would be as if the US created 860k new jobs in
December-January instead of the 385k it did.
In summary, look for next week’s events
(FOMC meeting, Dutch election, and G20 meeting) to limit the dollar’s downside,
barring a significant disappointment that makes
participants doubt the certainty of a hike next week. Rather than a repeat of last week buy the rumor sell
the fact, we suspect the opposite, with most of the dollar’s decline likely
since yesterday’s ECB meeting. The two week’s of rising US yields (a tenth day of rising 10-year yields would be
longest such streak since the mid-1970s) warns of a potential turning point in
the market.
months of more than 45k job gains. In the past two months, Canada has
grown A small decline is expected by the median
forecast. It has grown 86k net new full-time
jobs. Given that Canada is roughly one-tenth
the size of the US, that would be as if the US created 860k new jobs in
December-January instead of the 385k it did.
In summary, look for next week’s events
(FOMC meeting, Dutch election, and G20 meeting) to limit the dollar’s downside,
barring a significant disappointment that makes
participants doubt the certainty of a hike next week. Rather than a repeat of last week buy the rumor sell
the fact, we suspect the opposite, with most of the dollar’s decline likely
since yesterday’s ECB meeting. The two week’s of rising US yields (a tenth day of rising 10-year yields would be
longest such streak since the mid-1970s) warns of a potential turning point in
the market.
US Jobs Data: Deja Vu All Over Again?
Reviewed by Marc Chandler
on
March 10, 2017
Rating: