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FX Daily, November 03: Dollar Firms Ahead of What is Expected to Be Strong US Jobs Data

Swiss Franc

The Euro has fallen by 0.13% to 1.1631 CHF.

EUR/CHF and USD/CHF, November 03

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EUR/CHF and USD/CHF, November 03

Source: markets.ft.com - Click to enlarge

FX Rates

The US dollar is firm but is not going anywhere quickly. The lack of fresh interest rate support and uncertainty over the US tax proposals, which the Brady, the Chair of the House Ways and Means Committee hopes to have a revised version out after the weekend so the committee work can begin on Monday.

The popular press seems to focus on some objections by Democrats, but this misses the point. The Republicans hope to pass tax reform without relying on Democrats. It is the same strategy employed for health care reform, and the problem then and the challenge now is within the Republican Party and its constituencies. A wing of the GOP wants no increase in the deficit, and another wing wants lower taxes. Immediately upon the release of the proposals, the National Federal of Independent Business objected that the bill would not help most small businesses. The National Association of Realtor objected and homebuilder shares sold-off yesterday.

FX Daily Rates, November 03

FX Daily Rates, November 03

- Click to enlarge

Tokyo markets were closed, which contributed to a subdued Asian session. The Nikkei closed the week with a 2.4% gain after a 2.6% gain the prior week. The Nikkei is sitting on 20-year highs and is on an eight-week run. Foreign investors are re-weighting toward Japanese shares after having cut exposure earlier in the year. There is some chunky option expires today. There is $2.2 bln struck at JPY114.00 and another $1.1 bln at JPY114.50. On the downside, there is an option at JPY113.80 for $400 mln that expire today.

The euro reached almost $1.1690 yesterday, its best level since the ECB meeting, but was unable to close above the $1.1660 important technical level. The single currency has been confined to less than a cent range this week. The over-extended condition we warned of is being alleviated by the sideways trading this week. Between $1.1595 and $1.1600, there are options with a notional value of 1.8 bln euros set to expire today. There are roughly another 1.8 bln euros struck between $1.1670 and $1.1700.

The US dollar found support in front of CAD1.28, where a $512 mln option is struck that is set to expire today. A break sees additional US dollar support near CAD1.2750-CAD1.2780. The CAD1.2900-CAD1.2930 marks the nearby cap.

FX Performance, November 03

FX Performance, November 03

- Click to enlarge

China

Many observers think that the Chinese government may flatter its economic data, and they give private data more credence. However, the situation is more complicated, and this is born out with the PMI. The official measure showed weakness in the non-manufacturing sector (54.3 from 55.4), but the Caixin measure reported earlier today showed a modest increase to 51.2 from 50.6.

The more important development in China was the PBOC’s large injection via one-year money that helped calm the government bond market. The 10-year yield had risen nearly 20 bp in recent days and the official action this week which injected nearly CNY1 trillion this week, which essentially replaced the maturing loans. The US dollar closed higher against the yuan for the second consecutive session, but all this did was pare its weekly loss to about 0.3%.

China Caixin Services PMI, Oct 2017

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China Caixin Services PMI, Oct 2017

Source: Investing.com - Click to enlarge

United Kingdom

Sterling continues to trade heavily and has marginally extended yesterday’s losses.   It has approached $1.30, where today there is a GBP694 mln option struck there that expires in NY.  Last month’s low was just below $1.3030.  Sterling has not traded below there in two months.   The somewhat stronger than expected service sector PMI (55.6 vs. 53.6 in September).  It is the strongest since April.  The composite reading rose to 55.8 from 54.1.  It is also a six-month high.  A move above $1.2120 would help lift the technical tone.

U.K. Services PMI, Oct 2017

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U.K. Services PMI, Oct 2017

Source: Investing.com - Click to enlarge

United States

The focus in the US is in the monthly employment data. The consensus calls for around a 300k increase. We suspect the risk is on the upside. That said, it probably requires more than 370k to excite the market, which realizes that the data is a payback from the loss of jobs due to weather in September.

U.S. Unemployment Rate, Oct 2017

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U.S. Unemployment Rate, Oct 2017

Source: Investing.com - Click to enlarge

Hourly earnings may have also been skewed from the storm. A 0.2% rise, given the base effect, would see the year-over-year rate slow to 2.7% from 2.9%. The average this year through August was 2.6%. Other measures of labor compensation, like the recent Q3 Employment Cost Index, shows a modest acceleration.

U.S. Average Weekly Hours, Oct 2017

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U.S. Average Weekly Hours, Oct 2017

Source: Investing.com - Click to enlarge

U.S. Nonfarm Payrolls, Oct 2017

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U.S. Nonfarm Payrolls, Oct 2017

Source: Investing.com - Click to enlarge

U.S. Participation Rate, Oct 2017

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U.S. Participation Rate, Oct 2017

Source: Investing.com - Click to enlarge

U.S. Trade Balance, Sep 2017

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U.S. Trade Balance, Sep 2017

Source: Investing.com - Click to enlarge

U.S. Markit Composite PMI, Oct 2017

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U.S. Markit Composite PMI, Oct 2017

Source: Investing.com - Click to enlarge

U.S. Services PMI, Oct 2017

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U.S. Services PMI, Oct 2017

Source: Investing.com - Click to enlarge

U.S. ISM Non-Manufacturing Employment, Oct 2017

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U.S. ISM Non-Manufacturing Employment, Oct 2017

Source: Investing.com - Click to enlarge

Canada

We note that Canada reports its jobs figures as well. With the Bank of Canada warning that the economy may slow after a strong H1 and has turned decidedly cautious after two hikes in Q3, the market has reacted strongly to disappointing data. That could be the case with today’s jobs report. In September, Canada created 112k full-time jobs. Proportionately, this is as if the US created over a million jobs in a single month.

 

Canada Participation Rate, Oct 2017

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Canada Participation Rate, Oct 2017

Source: Investing.com - Click to enlarge

Canada Unemployment Rate, Oct 2017

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Canada Unemployment Rate, Oct 2017

Source: Investing.com - Click to enlarge

Canada Employment Change, Oct 2017

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Canada Employment Change, Oct 2017

Source: Investing.com - Click to enlarge

The Australian dollar is the weakest currency on the day, thus far, and is off nearly 0.5%. It was sold in response to the disappointing retail sales. Rather than recover from August’s  0.5% decline as the market expected, they were unchanged. The central bank meets next week but is on a decidedly steady course with a 1.5% cash rate. The Aussie is nearing support near $0.7665, and a break of it would signal a test on the recent low from late October near $0.7625 initially.

While our “one-and-done” view was widely shared, it was by no means universal, but the BOE seemed even more dovish than many expected. It no longer is threatening to raise rates more than the market expects, and looking at the short-sterling futures strip, the bias is toward two hikes by the end the end of 2019.

Graphs and additional information on Swiss Franc by the snbchf team.

Marc Chandler
He is Global Head of Currency Strategy of Brown Brothers Harriman (BBH). He has been covering the global capital markets in one fashion or another for 25 years, working at economic consulting firms and global investment banks. He regularly appears on CNBC and has spoken for the Foreign Policy Association. In addition to being quoted in the financial press daily, Chandler has been published in the Financial Times, Foreign Affairs, and the Washington Post. BBH provides specialist services and innovative solutions to many Swiss asset managers that include a global custody network of close to 100 markets, accounting, administration, securities lending, foreign exchange, cash management and brokerage services. Feel free to contact the Zurich office of BBH
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