Today, the highlight is likely to be the US employment report for June as investors try to figure out how aggressively the Fed may proceed with cutting rates, after it signaled that it would “act as appropriate” to sustain economic expansion. Apart from the US report, we get jobs data from Canada as well. A decent report could keep BoC officials’ hands away from the cut button, at a time when most of the other major central banks are already cutting rates, or signaled they could do so soon.
The dollar traded in a quiet fashion yesterday, staying in small ±0.20% ranges against most of its G10 counterparts. The exceptions were NZD and SEK, against which it gained more.
Although there was not much activity in the FX sphere, in the equity world, indices continued to gain, with most major EU and Asian ones closing in the green. US markets were closed yesterday in celebration of the Independence Day. It seems that bets over easy monetary policy worldwide remained high for another day. Indeed, this is also supported by the further slide in major economies’ government bond yields.
It is worth mentioning that the German 10-year yield matched the ECB’s deposit rate of -0.4% (it even traded fractionally lower at some point), another sign that market participants expect a rate cut by the ECB soon. As we noted yesterday, Eurozone money markets suggest that a 10bps rate cut in the deposit rate may come in September. There is even a 48% chance for such a cut to materialize at the Bank’s July meeting. That said, according to a recent report, ECB officials may not rush into additional easing in July, and perhaps wait for September, when they will have the updated macroeconomic projections to work with. We believe that they could use the July meeting to lay the groundwork for a potential action in September.
As for today, the spotlight is likely to fall to the US employment data for June as investors try to figure out how aggressively the Fed may proceed with cutting interest rates. Nonfarm payrolls are expected to have risen by 160k, following May’s disappointing print of 75k. The unemployment rate is anticipated to have held steady at its 49.5-year low of 3.6%, while average hourly earnings are forecast to have accelerated to +0.3% mom from +0.2%. Barring any deviations to the prior prints, this could drive the yoy rate back up to +3.2%, as the monthly rate of June 2018 that will drop out of the yearly calculation was +0.1%.
Having said all that though, on Wednesday, the ADP report showed that the private sector gained less jobs than anticipated. Specifically, it revealed a job gain of 102k, instead of 140k as the forecast suggested. Although the ADP is far from a reliable indicator of where the NFP print may come in, given that it is the only major gauge we have, we will dare to say that the risks of the NFPs forecast may be tilted to the downside. Remember that last month, the large miss in the ADP was followed by a disappointment in the NFPs.
At its latest meeting, the Fed dropped its “patient” stance and instead noted that it will “act as appropriate” to sustain the economic expansion. What’s more, 7 of its 17 members favored two quarter-point rate cuts by year end, which has prompted market participants to ramp up their bets with regards to lower US rates, fully pricing in a 25bps cut for the next gathering in July, and even assigning a decent probability for a 50bps cut. The chance for a “double” cut eased after Fed Chair Powell said last week that policymakers are “grappling” with whether uncertainties around trade and tame inflation warrant lower interest rates, and after US President Trump agreed with his Chinese counterpart to restart trade talks. However, following the weaker than expected US data on Wednesday, that probability slightly rebounded again. According to the Fed funds futures, it now stands at 31%.
So, having all that in mind, we believe that a disappointment in the NFP number, especially if accompanied by a slowdown in earnings, could prompt market participants to push that number higher and increase bets with regards to more aggressive easing through the rest of the year. Currently, apart from a July quarter-point cut, they almost fully price in another one for September, and a third one for January next year. The January one may come forth to December, as was the case last week. This means that the dollar could slide, and strangely, equities could gain further on the increasing Fed-cut bets. The opposite could be true if we get a strong report, consistent with further tightening in the US labor market.
Moving ahead, even if the dollar slides on a softer-than-expected report today, we remain skeptical as to how much downside room there is left against some of its major peers, for example the pound and the euro. The market appears overly pessimistic with regards to the Fed’s future plans, and we see the case for the Fed to match those expectations as a hard task. Even if officials decide to cut twice this year, this would still be less than the almost three cuts priced in by the market. On the other hand, the ECB is expected to deliver a 10bps cut in September and thus, anything above and beyond that (for example, a deeper cut or a restart of the QE), combined with less than expected cuts by the Fed, may result in a lower EUR/USD exchange rate. With regards to Cable, the same reasoning applies. Taking into account BoE Governor Carney’s latest remarks, it seems that the BoE has now started turning more cautious, with disappointing data suggesting that it could drop its hiking bias soon. GBP-traders have just started to digest the potential shift by the BoE, and remember they still have to deal with the uncertainty surrounding Brexit.
Apart from the US employment report, we get jobs data for June from Canada as well. The unemployment rate is expected to have ticked up to 5.5% from 5.4%, while the employment change is expected to have slowed to 10.0k from 27.7k in May. Following the decline from 5.7% to 5.4% in May, a tick up to 5.5% in June for the unemployment rate is not that bad in our view, neither a slowdown in job gains, if we consider that May’s 27.7k followed April’s record print of 106.5k. Coming on top of the strong acceleration in the CPIs for May, and the better-than-expected monthly GDP for April, a decent employment report could keep BoC officials’ hands away from the cut button, at a time when most of the other major central banks are already cutting rates, or signaled they could do so soon, and thereby support the Loonie.
USD/JPY stayed flat for the whole day yesterday, but from the beginning of this week it had been in a sliding mode, trading below a short-term downside resistance line taken from the high of June 11th. Looking at the 4-hour chart, we notice that the pair could be forming something like a small head-and-shoulders pattern with a neckline at 107.54. Also, the pair is currently balancing slightly below it 50, 100 and 200 EMAs. By taking into account everything what was mentioned above, we will stay somewhat bearish, at least in the short run.
In order to get comfortable with lower levels, we need to see a break below the 107.54 hurdle, marked near the lows of June 28th and July 3rd. This way, the pair would confirm the possible head-and-shoulders pattern and could slide further. We will then aim for the 107.00 zone, marked near the low of June 21st, which may provide additional support for the rate. Even if USD/JPY rebounds slightly from there, as long as it remains below the 107.54 area, we will continue targeting lower levels. Another slide and a break of the 107.00 obstacle could push the pair to the 106.77 zone, marked by the lowest point of June.
Alternatively, in order to start aiming for higher areas, we would wait for a break of the aforementioned downside line and a move above the 108.55 barrier, which is the high of this week. This way, more bulls could start joining in and driving the pair in the upwards direction. We would then target the 108.80 obstacle, marked by the high of June 11th, a break of which could send USD/JPY to the 109.15 level, which marks the lows of May 15th and May 29th.
EUR/CAD continues to sail south, trading below its short-term downside resistance line taken from the high of June 25th. At the same time, our oscillators are showing signs of bottoming, which may attract some attention from the buyers. However, for now, as long as that downside line remains intact, we will keep on targeting slightly lower areas.
A drop below yesterday’s low, at 1.4706, would confirm a forthcoming lower low and EUR/CAD may slide further, potentially aiming for the 1.4685 hurdle, which held the rate from falling on October 18th, 2017. The rate might rebound from there, but if it continues to respect the aforementioned downside resistance line, we will remain sceptical about any larger corrections to the upside. Another move lover and a break below the 1.4685 area could open the door to a test of the 1.4635 level, marked by the lows of September 28th and October 5th, 2017.
On the upside, if the pair eventually breaks above that downside resistance line and pushes above the 1.4762 barrier, marked by yesterday’s high, this could temporarily spook the bears from the field and the bulls could take charge, lifting the rate higher. That’s when we will aim for the 1.4802 hurdle, a break of which may send EUR/CAD to the 1.4853 zone, marked by the high of July 2nd.
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