Today, market participants are likely to turn their attention to the US jobs data for December. Expectations are for a decent report, which could ease somewhat investors’ concerns with regards to the health of the US economy. Eurozone’s preliminary inflation prints are also likely to be closely watched, as investors try to assess whether and how the ECB may adjust its language on the Euro area economic outlook at its upcoming gatherings. Fed Chair Jerome Powell’s speech and Canada’s employment numbers could attract attention as well.
The dollar traded lower against most of the other G10 currencies yesterday, weighed by the disappointment in the ISM manufacturing index for December, which tumbled from 59.3 to 54.1, its lowest since November 2016. The New Orders sub-index plunged 11 points to 51.1, which suggests that the trade war has left its marks to the US economy as well. The greenback outperformed only against JPY, while the main winners were AUD, CAD and NZD.
Following the flash crash during the Asian morning yesterday, the rest of the day was marked by opposite reactions in the FX world. Namely, the yen slid after soaring on the flash crash, while the Aussie and the Kiwi regained most of their lost ground. Bearing in mind the overstretched nature of the crash, this did not come as a surprise to us. After all, yesterday we noted that the moves may partially correct themselves.
That said, we repeat that the fundamentals that have been weighing on investors morale recently remain in the limelight, with concerns over a global economic slowdown at the top of the list. Indeed, despite the reversal in the currency moves, the equity market performance proves that investors remained nervous, with major EU and US indices closing their sessions in the red. Wall Street felt also the heat of the slide in the ISM index. Asian stocks rebounded somewhat today, calmed by news that US and China will hold vice-ministerial level talks next week over trade.
Now the spotlight is likely to turn to the US employment data for December. Expectations are for non-farm payrolls to have increased 177k, more than the 155k rise in November, and still a decent number consistent with further tightening of the US labor market. Yesterday, the ADP report showed that the private sector gained 271k jobs instead of 178k as was projected, which may have raised some bets for the NFP number to exceed its forecast as well. However, we repeat for the umpteenth time, that the ADP is not such a reliable indicator of where the NFP print may come in.
With regards to the unemployment rate, it is forecast to have held steady at 3.7%, its lowest since 1969, while average hourly earnings are anticipated to have accelerated to +0.3% mom from +0.2% in November. Nonetheless, barring any revisions to the prior prints, this could drive the yoy rate down to +3.0% from +3.1%, as the monthly rate of December 2017 that will drop out of the yearly calculation was +0.4%.
Overall, the forecasts point to a decent report, with the potentially still-strong wage growth suggesting that consumer prices, at least in core terms, could accelerate a bit more in the near future. Headline inflation could still slow somewhat further due to the latest slide in oil prices. Such a report could help the dollar to rebound again, as it may prompt market participants to bring somewhat forth their expectations with regards to the Fed’s future plans. According to the Fed funds futures, following the big disappointment in the ISM manufacturing index, investors are now pricing in a 40% chance of a rate cut by the end of the year, at a time when the Fed projects two more rate hikes.
As far as the equity market is concerned, although a few months ago we would argue that a strong report, and especially accelerating wages, could prove negative for stocks, we now expect it to have the opposite effect. Back then, investors were afraid that the Fed may accelerate the pace of its hikes, and rising wage growth rates were adding to those concerns. Now, investors may focus more on the NFP print as a decent pick up may ease somewhat their worries with regards to the health of the economy.
Overall, USD/CAD is still in an uptrend, trading above the medium-term upside support line drawn from the low of the 1s of October. But, taking into consideration that yesterday the pair experienced heavy selling and that there is a bit of a distance between that medium-term line and where the rate is right now, we could see that area filled at some point soon. Hence why, from the short-term perspective, there is a good chance to see a follow-through of yesterday’s selling, but only until the rate reaches the above-mentioned upside line. As long as that line remains intact, we will aim higher in the longer run.
Looking at USD/CAD from the short-term perspective, if the rate fails to move above the 1.3500 barrier, the bears might jump in again and try to take control of the pair. This is when we will aim for the 1.3445 obstacle, a break of which might lead the rate towards the 1.3415 level, which is the low of the of the 19th of December and also coincides with the 200 EMA on the 4-hour chart. Certainly, further declines could drag the pair all the way to the previously-mentioned upside support line for a quick test.
On the upside, if USD/CAD moves back above the 1.3565 barrier, this might raise concerns over the prospect of short-term downside move. More bulls could quickly pick up on that and push the pair further up, to the next potential area of resistance at around 1.3607, a break of which may lead towards a re-test of the 1.3645 hurdle, marked by yesterday’s high.
Ahead of the US employment data, Eurozone’s preliminary inflation data for December are also likely to attract some attention. Expectations are for the headline rate to have ticked down to +1.8% yoy from +1.9% in November, while the core rate is forecast to have remained unchanged at +1.0% yoy. Last Friday, data showed that Germany’s CPI slowed by more than anticipated, something that tilts the risks, at least for the bloc’s headline print, to the downside.
At the press conference following the latest ECB decision, when the Bank ended its asset purchasing program, President Draghi noted that “The risks surrounding the euro area growth outlook can still be assessed as broadly balanced.” However, he added that the balance of risks is moving to the downside due to the persistence of uncertainties related to geopolitical factors, the threat of protectionism, vulnerabilities in emerging markets and financial market volatility.
The following day, Eurozone’s preliminary PMIs for December disappointed, with the bloc’s composite index hitting its lowest since November 2014. This may have increased concerns over the bloc’s economic performance, perhaps raising speculation that, if data continue to come in on the soft side, Draghi and co. will have change their language around the economic outlook soon, noting that the risks have shifted to the downside. So, having that in mind, a slowdown Euro area’s headline inflation, especially if accompanied by a negative surprise in the core rate, could prompt investors to add to those bets, and perhaps push further back the timing of when they expect the ECB to start raising rates.
Looking at a slightly bigger picture, EUR/CHF is trading within a downside channel formation, which started in the end of October. The pattern could continue for a while more, as the Swiss Franc is seen as a safer currency to be in in these market conditions. From the technical side, as long as the upper side of the channel remains intact, we will continue aiming lower.
Yesterday, EUR/CHF retreated after it hit resistance near 1.1280, but if it struggles to drop below the 1.1225 hurdle, it could rebound for another test near 1.1280, or the upper bound of the aforementioned channel. If EUR/CHF fails to move higher, this could be a good opportunity for the bears join the action and drive the rate lower. This is when we will aim for the 1.1225 support zone again, a break of which might clear the path to the 1.1185 area, marked by Wednesday’s low.
On the other hand, if the rate breaks above the upper side of the channel, this could worry the bears and put under question their chances of dragging the pair lower. For a better confirmation of the upside, we would like to see a good push above the 1.1357 barrier, marked by the highs of the 22nd and the 30th of November last year. This way EUR/CHF could target the 1.1435 obstacle, a break of which might lead the rate to the 1.1470 level, which was the highest point of November 2018.
Apart from Eurozone’s inflation numbers, we get the bloc’s final service-sector and composite PMIs for December and as it is the case most of the times, they are expected to confirm their preliminary estimates.
We get the services PMI for December from the UK as well. This index is expected to have risen somewhat, to 50.7 from 50.4. However, as we already noted yesterday and the day before, we expect the UK PMIs, even the services one which is the more important, to attract less attention than usual. Indeed, the pound barely reacted to the releases of the manufacturing and construction indices. UK politics have been overshadowing economic data recently, and thus we expect the pound’s faith to be dictated by developments surrounding the Brexit landscape.
Later in the day, at the same time we get the US employment report, we get December jobs data from Canada as well. Expectations are for the unemployment rate to have ticked up to 5.7% from 5.6% in November, while the net chance in employment is forecast to show that the economy gained only 6.8k jobs. On the one hand, given last month’s record gains, this numbers appear normal to us and we don’t expect them to raise any doubts with regards to the performance of Canada’s labor market. On the other hand, even if we see a small upside surprise, we don’t expect something like that to revive hopes of a January-hike by the BoC.
On the speakers’ front, Fed Chair Jerome Powell is scheduled to participate in a discussion with former Fed Chairs Janet Yellen and Ben Bernanke at the American Economic Association Meeting in Atlanta. Following Kaplan’s remarks that he favors no rate moves for the first half of the year, it would be interesting to hear Powell’s view, especially in the aftermath of the employment numbers. Atlanta Fed President Raphael Bostic, Richmond Fed President Thomas Barkin, and St. Louis Fed President Jams Bullard are also scheduled to speak.
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