The US dollar has struggled for several sessions as the market so far has been able to brush aside concerns linked to the trade war theme as US and Chinese tariffs go into effect today. Will the US jobs numbers later today prove sufficiently surprising to change the plot?
The Federal Open Market Committee minutes released late yesterday hardly merited any response from the market, which seems distracted by the trade wars theme. Judging from the widespread complacency across markets over the last few sessions, however, the market is far from panic mode and perhaps feels that the tariff threat keeps the risk of more aggressive Fed tightening at bay.
Indeed, in the minutes, many Fed members fretted about the flattening yield curve and the specific risks from tariffs even as the very strong economic data was noted. So the chief question ahead of today’s latest batch of US jobs and earnings numbers is whether these are so overwhelmingly strong that they overcome the market’s complacent view on Fed tightening. We have a hard time seeing data sufficiently weak over the coming monthly cycle or two to justify the current pricing of less than 50/50 probability that the Fed moves twice more this year.
The USD has traded weakest in recent sessions against the smaller G-10 currencies and against emerging market currencies, which generally bounce on any relief from a strong USD and as the Fed rate outlook and the long end of the US yield curve has gone very quiet.
The JPY is also weak as safe haven demand has dried up (and likely due to relief linked to JPY-funding of EM carry trades). Across a number of USD pairs, the US dollar has weakened to the brink of – or into – key pivot zones – whether 1.1700-50 in EURUSD, 0.7450-0.7500 in AUDUSD and the 1.3000-1.3050 area in USDCAD. So today’s data looks important for whether we end the week with the USD headed over the brink and setting up an extension of weakness, or whether a sufficiently strong data set to shock the USD back to life.
In the US June jobs numbers, we continue to look at the average hourly earnings series more than the payrolls change numbers, as one would expect the latter to begin declining anyway as theoretical maximum employment (at least for those looking for a job) nears. Average hourly earnings are expected at +0.3% MoM / +2.8% YoY. The participation rate drop has flattered the headline unemployment rate number over the last couple of months, and we see the unemployment rate as providing the least important signal unless it registers a steady 3.8% level or drop despite a higher participation rate due to very strong household survey payrolls growth.
Over the weekend, the market is focused on the UK Cabinet summit at May’s Chequers residence intended to produce a coherent Brexit strategy. The summit could result in cabinet resignations if May’s line is seen as too soft and eventually lead to a challenge of May’s leadership. Sterling is weaker on concerns linked to this story despite increasing odds of a Bank of England rate hike at the August meeting.
AUDUSD is rather typical of a number of USD pairs in having risen to pivotal levels ahead of today’s US jobs numbers. The 0.7450-0.7500 area needs to hold as resistance to keep the immediate prospects of more downside intact, although the trend channel arguably doesn’t fully come under pressure from the bulls until a bit higher still, depending on the timing of any eventual rally.