Mixed Signals

 

 

The USD ceded some ground to the other majors this week, in spite of a late rally. As you can see from the one day relative performance table, investors were caught leaning the wrong way ahead of the week’s main data release, Friday’s non-farm January payrolls report on the US labour market. The report smashed expectations as the economy added 257K jobs, far above the 230K that was expected. In addition, the November and December reports were revised up by 147K making it the strongest three months of jobs gains in 17 years. Not to be outshined, average hourly earnings surged from last month's disappointing -0.2% to a whopping 0.5%, which was the highest monthly jump in average hourly earnings since November 2008. However, on an annual basis the increase was a less impressive 2.2%. Nevertheless, these reports restored a large amount of faith in the US economic recovery. Sentiment had been firmly against the USD since the beginning of January as U.S. economic reports were sending mixed signals about the strength of the economy and the timing of the Fed’s first interest rate hike. Doubts about the Fed’s timing arose after disappointing December average hourly earnings and retail sales. Other reports adding to the discourse was the falling employment component in both the ISM Manufacturing report and the ISM Non-Manufacturing report and the 17.6% rise in layoff announcements in the Challenger Grey & Christmas reports.

 

Friday’s very strong labour market reports have put a June rate hike by the Fed back into the picture. This will allow the Fed to drop or dilute it reference about “patience” at its March meeting, which would lay the groundwork for an interest rate hike at its next meeting in June, which incidentally also includes a press conference. On the other hand, the Fed can certainly afford to remain patient before raising interest rates, given the global deflationary backdrop, the downward pull on inflation from low oil prices and the strong USD. But before we get to the next FOMC meeting on March 18th, the USD may come under pressure ahead of the release of the January FOMC minutes on February 19th and U.S. Federal Reserve Chair Janet Yellen’s semi-annual congressional testimony on monetary policy on February 24th.

 

Before we end this Dispatch, we would like to make two short points about the euro and CAD. The euro has been going back and forth within a 2 cent range on headlines about Greece and its solvency. One of our favorite sound bites this week came in an exchange with European Parliament President Martin Schulz and Greek finance minister Yanis Varoufakis. Schulz warned that Greece risks national bankruptcy if it continues down the path of non-agreement. Varoufakis’ response was to simply restate what he had previously said that Greece is already bankrupt. What you need to understand is that this is just plain old posturing and that the real negotiation will occur in the 11th hour. Greece needs about 10bln euros by the end of the month, but even this deadline may extend for another few months. Positive headlines will cause a short squeeze in the euro while negative headlines will cause the euro to sell off.