The yen strengthened yesterday following comments by US President Trump that Japan may be his next tariff target. The Canadian dollar also gained, on hawkish remarks by BoC Deputy Governor Carolyn Wilkins. As for today, focus is likely to be on trade developments as well as the August employment data from both the US and Canada.
The dollar traded mixed against the other G10 currencies on Thursday. It gained against SEK, AUD, NZD and NOK, while it underperformed versus JPY, CHF, CAD and GBP. The greenback traded virtually unchanged against EUR.
The main loser was the Swedish Krona, which tumbled after the Riksbank kept interest rates on hold and noted that it could delay raising them. Previously, the Bank has been advocating for slow repo-rate increases to start towards the end of the year, while yesterday, it noted that rates will be held unchanged in October, and then raised either in December or February.
The currency that gained the most against the dollar was the yen. The Japanese currency strengthened during the US trading session following comments by US President Trump suggesting that Japan may be his next tariff target. Speaking to a WSJ columnist, the President described his good relations with Japan’s leadership, but he also added, ‘Of course that will end as soon as I tell them how much they have to pay.’
Although the dollar did not strengthen against all the other major currencies, its performance pattern suggests that market sentiment remained fragile, as investors are still nervous that the new round of US tariffs on China could be announced at any moment. The public-comment period for the tariffs is already over and according to last week’s reports, the US could proceed with their imposition as early as today. Apart from the yen, the Swiss franc gained as well, while the commodity-linked currencies AUD and NZD ended the day slightly lower. The exception was CAD, which overperformed its neighboring USD, but that was due to individual stories (See below). The risk-averse market environment is more evident by the performance of the equity markets. Most major European and US indices continued to slide, with the exception being Dow Jones, which closed fractionally up.
As for today, besides the global trade arena, USD-traders are likely to also turn attention to the US employment report for August. The forecasts suggest that non-farm payrolls have risen 191k, after July’s increase of 157k. The unemployment rate is expected to have remained unchanged at 3.9%, a tick above its 18-year low of 3.8%, while average hourly earnings are anticipated to have risen 0.3% mom, the same monthly pace as in July. Without any revisions to the prior monthly prints, this could drive the yoy rate up to +2.8%, as the August 2017 monthly rate that will drop out of the yearly calculation was +0.2% mom.
Overall, the forecasts suggest that we are likely to get another decent report. Once again, barring any major deviation of the NFP print from its forecast, we expect the market response to be dictated by the earnings growth. Accelerating wages could raise bets of accelerating inflation in the near future and thereby strengthen further the case for the Fed to end the year with a total of 4 hikes. According to the Fed funds futures, the market is almost certain that the Committee will proceed with its next rate increase in September, while there is a 67% chance for another one in December.
Over the past couple of days, USD/JPY continues to feel pressure from the bears, who in their case are trying to bring the pair lower. USD/JPY is also trading below its short-term downside resistance line, drawn from the peak of the 1st of August, while the dip below 110.70 has confirmed a forthcoming lower low on the 4-hour chart. Thus, in our view, the short-term bias remains to the downside, at least for now.
During the Asian morning, USD/JPY found support just a few pips below the 110.40 level. A break of the 110.40 zone could lead to a test of the psychological 110.00 zone, which could stall the rate for a bit. This is the area where the bulls may try to fight back and perhaps drive the pair a bit higher. However, if in the end they still loose the battle, the bears could take control again and drive the pair below the psychological 110.00 hurdle, towards the next strong support at around 109.77.
Alternatively, in order to start examining the chances of a decent recovery, we would like to see a clear move back above the 110.70 level, which could lead to a test of the 111.15 barrier, marked by the inside swing low of the 4th and 6th of September. Further acceleration of the rate could lead to a test of the previously mentioned downside resistance line, which could hold the rate down, until the bulls and the bears decide over who take the driver’s seat from there.
The Loonie managed to outperform its neighboring greenback after BoC Deputy Governor Carolyn Wilkins said that at Wednesday’s meeting, the Bank discussed whether the “gradual approach” language on interest rates remains appropriate. She also noted that they may raise rates even if NAFTA talks fall apart, as protectionist measures could spur inflation.
Wilkins’ message appears much more hawkish than the one we got by reading the meeting statement. Her remarks suggest that the Bank is leaning towards faster rate increases and that NAFTA may not be a hurdle for an October hike. In the statement, policymakers noted that recent data reinforce their assessment that higher rates will be warranted, and that they will continue to take a gradual approach guided by incoming data. They also noted that the Bank is monitoring closely the course of NAFTA negotiations, which may have prompted many, including us, to assume that in case of a breakdown, the Bank may decide to pause.
The Loonie surged around 70 pips on Wilkins' remarks and gained further overnight after US President Trump said he believes Canada will end up being part of the new NAFTA. The US-Canada NAFTA talks are set to continue today, but besides that, CAD-traders are likely to focus on Canada’s employment report as well.
Expectations are for the unemployment rate to have ticked back up to 5.9% in August from 5.8% in July, while the net change in employment is forecast to show that the economy added only 5k jobs, but given that this is after July’s stellar print of 54.1k, it appears normal to us. Overall, we see it as a decent report, which, following the hawkish remarks by Wilkins, could keep expectations with regards to an October hike elevated.
GBP/CAD slid yesterday after it hit resistance near the 1.7100 barrier. That said, the fall was stopped by the 1.6950 level and the short-term upside support line drawn from the low of the 29th of August. Until that line is broken, we will stick to the upside for the short run. That said, looking at the bigger picture, because the pair is still trading below the medium-term downside resistance line taken from the peak of the 26th of March, the upside could be limited.
If GBP/CAD rebounds nicely from the short-term upside support line, this could lead to another test of the 1.7100 barrier, which acted as good resistance this week. A break above that, could send the pair higher towards the 1.7175 zone, marked by the high of the 31st of July. If that zone doesn’t stop the rate from accelerating further, then GBP/CAD could finally test the aforementioned downside resistance line, which could hold the pair down, at least for a while.
On the other hand, a break below the short-term upside support line, could indicate that the bulls are slowly losing their ground. The bears could quickly pick up on that and drive GBP/CAD towards the 1.6795 area, marked by the lows of the 30th of August and the 3rd of September. Further declines could lead to the 1.6695 hurdle, or even the 1.6585 level, which was near the lowest point of August.
During the European morning, we get Eurozone’s final GDP for Q2. Expectations are for the final print to confirm the second estimate and show that the bloc’s economy grew 0.4% in Q2, the same pace as in Q1.
From Canada, besides the employment data, we also get the Ivey PMI for August, which is expected to have slid marginally, to 61.4 from 61.8.
We also have three Fed officials speaking today: Boston Fed President Eric Rosengren, Cleveland Fed President Loretta Mester, and Dallas Fed President Robert Kaplan.
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