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FX Update: US employment data to draw focus

Written by Howard Wilcox on October 3rd, 2017.      0 comments

This week is a relatively big week for data releases, especially out of the US which culminates at the end of the week with the Non-farm payroll figure. Asian markets should be fairly subdued due to the Chinese National day holiday which lasts for most of the week. The week opens with risk-off sentiment abating over the Nth Korean situation after news over the last few days that the US was continuing to have dialog with Pyongyang, this saw Gold sliding in Asia after closing lower on Friday, while market concerns over the political fall-out in Spain over the Catalan independence referendum have so far been muted, however, investors remain concerned over any likelihood of the success of the Republican tax-cut proposals. The US dollar opens the week adding to gains from last week, when it benefited from some speculation President Donald Trump could opt for a new Fed chairman who might pursue a more aggressive schedule for policy tightening. Australia’s equity market headed higher after China, its top trading partner, reported an unexpectedly strong manufacturing data and announced plans to cut the amount of cash banks must hold as reserves for certain loans. Later today the reserve Bank of Australia at its policy meeting is widely expected to keep rates on hold at 1.5%.

After yesterday’s Labour Day holiday the main Australian news will centre around the RBA policy meeting and subsequent press release later this afternoon. The widely held view is that the RBA will keep rates on hold at 1.5%, but of interest are any indications when rate hikes will occur in 2018, or not. Markets are pricing in just over a 50% chance that rates will increase at the June 2018 meeting. Today’s expectations are that  the RBA statement comments will be unchanged from their recent comments, being that the Aussie economy is in a reasonable place, the labour market is tightening which should contribute towards higher wages growth  in 2018, thereby placing the RBA  on track to meet its inflation goals under the current accommodative monetary policy regime. After a brief period down around 0.7796 the AUD/USD is back above 0.7800 at 0.7820 after solid buying interest. The 0.7800 level is now crucial, with any sustained break below this level likely to extend to test 0.7740/50 levels. On the upside a push through resistance at 0.7910 would be required to attempt a retake of the 0.8000 level, we view this as unlikely in the short term.  

New Zealand
The week opened with the New Zealand dollar trading around the 0.7200 level against the USD, currently the NZD is at 0.7187 with a bias to the downside. Out earlier today, the NZIER Quarterly Survey of Business Opinion showed a drop in overall business sentiment, with a net 7% of firms positive about the outlook compared to 17% in the June quarter. However, indicators of firms' own activity held up quite well compared to last quarter. Given that this survey was conducted over September, general confidence may well have been affected by the uncertainty around the 23 September general election. A net 13% of firms reported growth in their own activity compared to 17% in June. This decline is consistent with the view that GDP growth in the September quarter may be slightly slower than the 0.8% rise recorded in June. In contrast, firms' expectations for the coming quarter picked up to the highest level in a year. Expectations of hiring, investment in capital and profits were all similar to last quarter. There is also another Global Dairy auction later tonight. This is expected to show around a 6% rise in the price of wholesale milk powder. The political situation remains unchanged with only preliminary coalition discussions talks being started later this week. Special vote results will not be known until 12th October. With the political outlook still unclear and better data from the US, it is hard to be bullish about the NZD even if fundamentals remain supportive. The downside remains favoured and we look for 0.7150 later in the week should upcoming US data remain solid.

United States
As the week/new quarter opens, U.S. equities are up to  new all-time highs and the US dollar stronger as factory data and the prospect for tax cuts boost optimism in the economy.
The S&P 500 Index closed at another record to start the fourth quarter and the dollar headed for the strongest level since July after ISM data showed U.S. manufacturing expanded at the fastest pace in 13 years. U.S. investors are also weighing up the prospects that Congress will enact a pro-growth tax plan and ongoing speculation that President Donald Trump may opt for a new Fed Reserve head who might pursue more aggressive stance on policy tightening. The beat of the US economy should be a little clearer at the end of the week with a slew of employment data out over the next few days culminating in the Non-farm payroll figure on Friday. Expectations are that the figures should remain on a positive track, however there may be a wildcard in the mix, the landfall of Hurricanes Harvey and Irma which has the potential to interrupt the 83 consecutive months of employment growth.
After hitting a high of 1.1814 overnight after comments from a Fed official that the Fed is responsible for lower inflation, and should not raise rates before inflation hits 2.0%, the EUR/USD weakened to currently trading around 1.1715. Immediate support is at 1.1690 then 1.1660, upside looks limited with 1.1780 likely to hold EUR advances over the next few days.

United Kingdom
The UK pound has lost the 1.3400 handle, falling to a low of 1.3255 overnight. It is now trading lower at 1.32441 after disappointing UK manufacturing PMI data last  night allied with increased political risk on the May leadership, that has potential to impact both Brexit negotiations and  domestic policies. The GBP is now trading with a more bearish tone, and despite the hawkish rhetoric from BoE Governor Carney towards rate hikes, this is being offset by concerns around the economic consequences of Brexit, and the absence of progress in negotiations, despite the latest speech from PM May.  Immediate support at 1.3250 looks to have broken, opening the way for an extension to the 1.3210 level which if broken would expose the 1.3150/70 region. The upside looks limited to 1.3300 over the next day or so and with more US data releases expected to be positive, a push though this level is doubtful.

Another rough start to the week for the EUR, as the common currency was affected by political jitters in Spain. The Catalonian referendum, which resulted in hundreds injured as the central police clashed with local voters, revived concerns over the fragility of the union, after Brexit. The unsought violence only deepened Spain’s political crisis, triggering the response of the UN High Commissioner for Human Rights, who called for "independent and impartial investigations into all acts of violence." This comes on the hard on the heels of a sour Merkel' victory the previous week in the German election. Despite the positive turn of the latest macroeconomic data indicating solid growth in the EU, such figures become meaningless when such political splits cast doubt of the ongoing viability union itself. Look for a move to 1.1690 then 1.1660. If US data is strong over the next few days 1.1660 will be under threat.

Yesterday, Japan’s quarterly Tankan business sentiment survey surged to its highest in a decade, with the main index for Q3 up to 22 from previous 17, citing strong employment, confidence and capital investment, a sign that the economic recovery is broadening. This will set the stage for a strong performance by incumbent PM Abe in the upcoming general election. With a more risk-off tone to start the week as Nth Korean tensions abate the USD/JPY looks to be in a more consolidative phase. Currently at 113.07, good US data over the next night or so could see a break of last week’s high at 113.25 which would then target major resistance at the 114.40 level.

The USD/CAD saw highs for the month on Friday up at 1.2531 but failed to hold these levels even with the price of oil lower the USD/CAD fell to 1.2466 yesterday. September data revealed a positive month overall for the Canadian manufacturing sector, with output and new business growth regaining momentum after August’s slowdown. However the CAD  starts week this with a bearish tone, with the USD/CAD now back at 1.2523 with a break of 1.2530 to target 1.2550 then the August high of 1.2605. Conversely 1.2460 provides immediate support, but given the positive US data expected over the next few days look for CAD bears to prevail.

Major Announcements
•    US Consumer Confidence 119.8 vs 119.9 expected
•    US Core Durable Goods Orders 0.2% as expected
•    RBNZ leaves interest rate unchanged
•    UD Final GDP 3.1% vs 3.0% expected
•    UK Current Account -23.2b vs -15.8b expected
•    Canadian GDP 0.0% vs 0.1% expected
•    UK Manufacturing PMI 55.9 vs 56.3 expected
•    US ISM Manufacturing PMI 60.8 vs 57.9 expected