Today, the spotlight could turn to the US employment report for December, where strong numbers could ease further concerns with regards to the US economy, and also prompt participants to push back their bets over another Fed cut. The pound slid after BoE Governor Carney hinted that the Bank could cut rates if economic weakness persists. On today’s agenda, apart from the US employment report, we also have jobs data from Canada.
The dollar traded higher against all but two of the other G10 currencies on Thursday and during the Asian morning Friday. It gained the most against NZD, SEK, JPY, and GBP, while it underperformed slightly only against CHF and AUD.
In the equity world, most major EU bourses continued sailing in positive territory, while all three major US indices hit new record highs. The sanguine morale was somewhat passed to the Asian session today. Although China’s Shanghai Composite slid 0.08%, Japan’s Nikkei 225 gained 0.47%. It seems that the easing of tensions in Middle East allowed investors to keep adding to their risk exposure, with news that Vice premier Liu He will be leading a delegation to the US next week for signing a “Phase One” deal, adding some support, although this was something already reported over the past few days.
As for today, USD-traders and equity investors may turn attention to the US employment report for December. Expectations are for nonfarm payrolls to have increased 164k, less than November’s stellar print of 266k, but still a solid number consistent with further tightening in the labor market. On Wednesday, the ADP report showed that the private sector gained 202k jobs, shifting the risks of the NFP forecast somewhat to the upside. However, we have to repeat for the umpteenth time that the ADP is far from a reliable predictor for the NFP number. Even in November, the ADP revealed a 67k job gains, but nonfarm payrolls came in at 266k.
As for the unemployment rate, it is forecast to have remained unchanged at its 50-year low of 3.5%, while average hourly earnings are anticipated to have accelerated to +0.3% mom from +0.2%, which barring any revisions to the prior monthly prints, could keep the yoy rate unchanged at +3.1%.
At its last meeting for 2019, the FOMC decided to keep interest rates unchanged, reiterating that “the current stance of monetary policy is appropriate to support sustained expansion of economic activity.” With regards to the “dot plot”, it pointed to no action in 2020, one hike in 2021 and another one in 2022. However, market participants remained unconvinced that officials are done cutting rates, and even after the better-than-expected ISM manufacturing PMI, they see another one coming in November. A decent employment report is unlikely to vanish cut expectations, but it could prompt investors to push back that timing, perhaps into next year. This could support the dollar and perhaps boost US equities further, due to easing concerns with regards to the US economy.
USD/JPY has been in a rally mode since Wednesday, when it hit support slightly below the 107.75 zone. On the same day, the rate returned within the sideways range that’s been in place since November 4th, and at the time of writing, it looks to be headed towards the upper end of that range, at 109.70. Despite the latest rally, we would like to see a clear and decisive break above that hurdle before we get confident on more bullish extensions.
If the bulls are strong enough to overcome that barrier soon, we may then see them driving the battle towards the round figure of 110.00. They could take a break after hitting that barrier, thereby allowing the pair to correct slightly lower, perhaps to challenge the 109.70 zone as a support this time. They could recharge from there and perhaps push above the 110.00 zone, something that may set the stage for the 110.65 obstacle, which is defined as a resistance by the peak of May 21st.
Looking at our short-term oscillators, we see that the RSI is flat near its 70 line, while the MACD, although above both its zero and trigger lines, shows signs of slowing down. These indicators detect slowing upside speed and make us careful that a small retreat may first occur before the next positive leg.
However, the move that would confirm that traders want to keep the rate range-bound for a while more, may be a dip below 109.25. this could allow declines towards the 108.85 zone, marked by the inside swing high of January 2nd. Another break, below 108.85, could pave the way towards the lower end of the aforementioned range, at around 108.40.
The pound was among the losers yesterday, coming under selling interest after BoE Governor Mark Carney hinted that a rate cut could be delivered if weakness in the economy persists. “With the relatively limited space to cut Bank Rate, if evidence builds that the weakness in activity could persist, risk management considerations would favour a relatively prompt response,” Carney said.
His comments were more or less in line with the BoE’s language that if global growth fails to stabilize or if Brexit uncertainties remain entrenched, monetary policy may need to reinforce the expected recovery in UK GDP growth and inflation. Yes, MPs approved PM Johnson’s Brexit bill in its final reading yesterday, which is expected to become law in coming weeks after passing the House of Lords, but GBP-traders seem to already be concerned of what happens next, during the transition period. With Johnson insisting that a trade agreement with the EU has to be reached before December 2020 and EU Commission President Ursula von der Leyen saying that it would be “basically impossible” to agree on everything by year end, the element of uncertainty surrounding Brexit remains well on the table. Thus, if fears of a disorderly exit at the end of this year keep weighing on the UK economy, the BoE may be eventually forced to cut rates.
Flying from the UK to Canada, Loonie traders may lock their gaze on their nation’s employment report for December, which comes at the same time as the US one. The unemployment rate is expected to have ticked down to 5.8% from 5.9%, while the net change in employment is forecast to show that the economy has gained 25.0k jobs after losing 71.2k in November. The message we got from the last BoC gathering is that officials have quickly switched back to neutral, after flirting with the idea of easing at the prior meeting.
Yesterday, BoC Governor Poloz said that the potential downside risks from global trade frictions seem to have eased, but also added that the Bank will be watching closely to see whether the recent slowdown in job creation will continue. So, having all this in mind, combined with the accelerating inflation for the month, a relatively decent employment report is likely to confirm further officials’ choice of keeping their hands away from the cut button.
GBP/CAD started the new year in an indecisive mode, oscillating between the 1.6965 support and the 1.7120 resistance. That short range has been in place until today and thus, we would adopt a flat stance with regards to the short-term outlook of this exchange rate.
In order to start examining the downside, we would like to see a clear dip below 1.6965. Such a move would confirm a forthcoming lower low on both the 4-hour and daily charts and may initially aim for the 1.6880 barrier, which provided support on November 7th and 8th. If that barrier fails to halt the slide, then we may see the bears putting the 1.6815 zone, defined by the inside swing high of October 28th.
Shifting attention to our momentum studies, we see that the RSI stands flat near its 50 line, while the MACD is also flat near both its zero and trigger lines. Both indicators suggest a lack of directional speed and enhance our choice to remain sidelined for now.
On the upside, we prefer to wait for a break above the upper bound of the aforementioned range, at 1.7120, before we start assessing whether the bulls have gained control. This could open the door for advances towards the high of December 31st, at around 1.7220, the break of which could extend the gains towards the peak of December 18th, near 1.7280.
During the European morning, we already got Norway’s CPIs for December. Both the headline and core rates slid to +1.4% yoy and +1.8% yoy, from +1.6% and +2.0% respectively.
We also have one speaker on today’s agenda: BoE MPC member Silvana Tenreyro.
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