Dollar Firms After Solid US Jobs Report

Daily Analysis - 10/07/2017

Fed Tightening Back in Focus as Labour Fundamentals Improve

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The US dollar was holding ground close to a two-month high against the Japanese Yen on Monday after promising jobs creation data spurred a rally in the pair. A bigger-than-expected addition in U.S. jobs suggested the Federal Reserve would most likely stick to its tightening plans for the remainder of the year.

Dollar Longs Re-enter After Payroll Positivity


US nonfarm payrolls rose by 222,000 jobs in June, buoyed by hefty gains in the healthcare and services sectors according to data delivered by the Bureau of Labor Statistics on Friday. Last month’s reading was the second biggest payrolls increase of the year and easily topped economists' expectations of a rise of 179,000.

While the unemployment rate edged slightly higher to 4.40% from May’s 16-year low of 4.30%, it was largely the function of more people looking for work. The strong jobs data suggests the Federal Reserve will stick to its objective of a third interest rate hike this year alongside some efforts to trim the balance sheet. USDJPY was last seen around 114.250, with the pair facing strong resistance around 114.400 on the upside, a break above which could unlock additional gains.

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UK Economy Suffers Triple Blow


The Pound tumbled to a 10-day low against the dollar on Friday after a string of disappointing economic data points forced investors to withdraw from Sterling. UK industrial production unexpectedly shrank -0.10% in May as factory output declined and warmer weather reduced demand for energy. Separately, data released by the Office for National Statistics showed the goods trade deficit increasing to GBP 11.863 billion ($15.33 billion) in May from GBP 10.595 billion in April, widening beyond the consensus forecast.

Construction sector growth also slowed in June, as political uncertainty hampered new orders. The widely-followed Markit/CIPS UK Construction PMI reversed from a 17-month peak of 56.0 in May to 54.8 in June, missing economists’ projections of 55.0. The latest signs of weakness greatly have reduced the likelihood of the Bank of England raising interest rates this year. After the selloff, GBPUSD is rebounding in early Monday trade to currently hover just below 1.2900.

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Chinese Inflation Steadies


Data released overnight revealed that headline consumer price inflation remained unchanged in June as weaker growth in non-food prices was offset by a smaller than expected drop in food prices. The consumer price index edged 1.50% higher in June from a year ago, matching the 1.50% gain recorded in May per figures unveiled by the National Bureau of Statistics. Food prices dropped -1.20% from a year ago, after falling -1.60% in May.

Non-food prices increased 2.20% from the same period last year, after rising 2.30% in May. Despite stabilizing, inflation remains well below the targeted 3.00% inflation set for the current year by Beijing, with the -0.20% contraction in June inflation raising concerns about reaching the inflationary goal. After recovering from the prior week’s lows, USDCNH is stuck within a narrow trading range around the 6.8000-mark early Monday.

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Lonnie Reaches 10-Month High Ahead of Bank of Canada Decision


The Canadian dollar rallied to a 40-week high against the Greenback on Friday after stronger than expected jobs figures increased the odds of the Bank of Canada lifting interest rates as early as this week. The Canadian economy added 45,300 jobs in June, comfortably topping the 10,000 increase forecast by economists. In addition to robust job creation, the unemployment rate fell to 6.50%, matching the lowest level since April.

Investors reckon the latest sign of strength in the labour market should further bolster policymakers’ case to tighten monetary policy sooner rather than later. Data from the overnight swaps market show that the likelihood of a rate hike during the bank’s July 12th meeting rose to 93.00% from 86.00% just before the jobs report. After Friday’s decline, USDCAD is mounting a mild pullback early Monday to trade around 1.2890.

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