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US Employment Data to Determine Whether the Greenback’s Rally since mid-July is Over…Maybe

US Employment Data to Determine Whether the Greenback's Rally since mid-July is Over...Maybe

Overview: One key issue for market participants is if the dollar's pullback is the beginning of something important or is largely position adjusting ahead of today's US jobs report. We suspect that the dollar's rally that began in mid-July is over, though a strong employment report that boosts the chances of a Fed hike before year-end could quickly demonstrate the folly of making claims ahead of what is still one of the most important reports in the monthly cycle of high-frequency data. The greenback is sporting a mostly firmer profile in quiet turnover against the major currencies. The yen is the weakest in the G10 space, slipping about a third of one percent. On the other hand, most emerging market currencies are trading higher, including the South African rand and Mexican peso, which were thumped yesterday.

Equities are mostly firmer. In the Asia Pacific region, Tokyo was the notable exception among the large bourses. Europe's Stoxx 600 is extending yesterday's corrective gains after falling by more than 2.25% in the first three sessions this week. US index futures are firm ahead of the jobs report. Benchmark 10-year yields are 1-3 bp higher in Europe and the US. That puts the 10-year US Treasury yield near 4.73% (up about five bp this week). Note that Italy's 10-year premium over German widened by about 14 bp this week and now above 200 bp is near the high for the year having bottomed in mid-June near 155 bp. Gold is trapped in its trough (the low set yesterday near $1813) and is nursing a 1.5% loss this week after falling almost 4% last week. An unexpected drop in US gasoline inventories heighted concern about oil demand and sent the November WTI contract tumbling to ~$82.15 yesterday. It is stuck near there today, unable so far to rise much above $83. It will snap a five week advance with a sharp loss. Around $82.25, it is off almost 9.4% this week, the largest weekly fall since March. Lastly, down almost 4.1% this week, copper is threatening to post its biggest weekly loss of the year.

Asia Pacific

Japan's Kishida is the first LDP Prime Minister to speak the labor confederation Rengo conference since 2007. Kishida appears to recognize that the economy and his own political fortunes may be tied to stronger wage growth. Rengo mostly represents full-time salaried workers who have seen real incomes fall by 2% since Kishida took office. The government will unveil a new supplemental budget later this month, and there is some speculation that it could include some kind of subsidy or tax break for wage increases. Today's data showed that in August, real cash earnings are off 2.5% year-over-year (-2.1% expected). In the year through last August, real cash earnings had fallen by 1.7%. In August 2021 rea1 cash earnings had risen by 1.1%. Before that, in 12-months through August, real cash earnings had not risen since 2016. Consumption is a function of jobs, income, and wealth. Today's data showed that housing spending in Japan fell by 2.5% year-over-year in August (vs.-3.9% expected after -5.0% in July). The last year that Japan reported a year-over-year increase in consumption was 2018 (0.1%). Before that it was in 2013. In Q2 23, consumption accounted for slightly more than 54% of Japan's GDP. Consumption contracted by 2.5% in Q2 and has averaged 0.2% over the past four quarters. In 2022, the consumption spending of worker and non-worker households in Japan averaged about JPY244.2k ($1860) a month, which is lower than it was in 2013.

The softness of US interest rates, perhaps helped by the further drop in oil prices, helped the yen find better traction even if there was no intervention earlier this week. The greenback pushed above JPY149 in early North American activity and was greeted by sellers who drive it back to session lows (~JPY148.25) in late dealing, which roughly corresponds to the 20-day moving average. The greenback recovered JPY149 in Asia and edged slightly higher in the European morning. Even though the emerging consensus is that the BOJ did not intervene earlier this week, the market seems reluctant to approach JPY150 (without stronger incentive). The Australian dollar fell to almost $0.6325 in the North American morning but trended back to session highs (slightly below $0.6380). It made a marginal new high today (~2/10s of a cent) but pulled back to session lows near $0.6355. Overcoming the $0.6400-20 area would lend credence to the idea a low is in place, not far from the June-July double top objective near $0.6300. Note that there are nearly A$2.2 bln in options at $0.6400 that expire today. The greenback slipped to a four-day low against the offshore Chinese yuan near CNH7.3025 today, and for the third consecutive session, recorded a lower high (~CNH7.3155). Recall it settled near CNH7.2950 when the mainland holiday began.


Germany's government agreed yesterday to reactivate a few coal-burning electric plants to "save gas and prevent supply shortages" this winter. This seems to be a stop-gap measure as Germany builds out it liquified natural gas infrastructure, including new gas-powered electric generation (that can be converted to hydrogen later). The decision is not anticipated to affect the goal to phase out coal in 2030 (rather than 2038). It will look at the carbon emissions from its decision and propose offsets next year. It appears that three coal-burning plants that were online last winter but on stand-by since July, will be reactivated until next March. Germany's decision suggests that there may not be an imminent breakthrough in EU negotiations of reform of the electricity market and how to treat nuclear energy. The EU energy ministers meet on October 17, but the risk is that the deadlock cannot be broken without greater political efforts, and this may dominate the heads of state summit later this month. France and eight other EU countries, mostly from central and eastern Europe are pushing for prolonging the existing nuclear facilities. 

Separately, note that Bavaria holds state elections this weekend. The outcome is hardly in doubt. The CSU and its junior partner the Free Voters of Bavaria, will most likely be returned to power. The more interesting aspect is the support for the AfD and Greens, and how poorly the SPD performs. The AfD garnered 10.6% of the vote in the last election. The Greens got 17.6% of the vote and the SPD received slightly less than 10% of the vote last time. 

In the UK, the one-year breakeven (the difference between the inflation-linked security and the conventional rate) is at 3.20%. At the end of August, it was near 1.50% and reached 3.50% at the end of last week. The five-year breakeven was near 3.85% at the end of August and rose to nearly 4.10% in late September. It has trended lower since and slipped below 3.90% yesterday, the lowest in about six weeks. The BOE meets on November 2 and the swaps market has about a 32% chance of a hike and about a 54% chance of a move before the end of the year. Lastly, the focus is on Metrobank, whose shares tumbled by a quarter yesterday amid talk it seeks to raise GBP250 mln in equity and GBP350 mln in debt. The bank, one of the UK's top 10 banks, was refused by regulators last month to lower capital requirements on its mortgage business (by using internal models of valuation), which it now says it wants to sell. Shares stabilized today, and are up about 5.5% in the London morning, leaving them off around 1/3 on the week.

The euro found support near $1.05 yesterday, and although follow-through buying after Wednesday gains did not materialize in Asia or Europe, it did in the US. Today's low is a slightly above $1.0530. The euro rose a little through $1.0550 yesterday and extended the gains by a few of tenths of a cent today. The high for the week was set on Monday slightly above $1.0590. A close today above about $1.0575 would snap the euro's l1-week slide. Above there, the next technical hurdle is likely in the $1.0620-40 area. The 20-day moving average is the lower end of that range and the euro has not closed above it since August 30. Sterling also did not benefit from buying yesterday in Asia or Europe, but after a slow start, North American participants extended sterling's gains. It reached nearly $1.22, after bottoming on Wednesday just ahead of $1.2035. It has edged slightly higher today, but not above $1.2210, so far. The (38.2%) retracement of sterling's rally from last September's record low was about $1.2075 and the measuring objective of the head and shoulders pattern was closer to $1.20. If sterling is to recover, the next important area is $1.2270-$1.2310, which houses 1) the high from September 29, 2) the 20-day moving average, and 3) the (38.2%) retracement of the leg down that began in late August from around $1.2745. There are two set of interesting sterling options that expire today. One set for nearly GBP700 mln is struck at $1.22 and the other for about GBP735 mln is at $1.2225. 


A soft US employment report could spur another bout of short covering among the foreign currencies and in the US Treasury market. Almost 20% of the economists in Bloomberg's survey expect nonfarm payrolls to increase by 200k or more. About a quarter of the estimates are 150k or lower. The average is around 172k. Recall that in August, nonfarm payrolls rose by 187k, but there were downward revisions to the past two reports, reducing the previous estimates by 110k. The net effect of strikes and the end of some disputes could add around 3k jobs to the nonfarm payroll estimate--a rounding error. The unemployment rate, which jumped to 3.8% in August (3.5% in July) is seen slipping back to 3.7%. Average hourly earnings growth rose 5.1% in the year through September 2022. It is expected to have remained at 4.3%, matching the low since June 2021. A 0.3% monthly increase would bring Q3 annualized pace to 3.6% from 4.4% in Q2. One of the impacts of slower growth in employment is slower growth income, which has knock-on effects on consumption. Slower consumption is a key to many projections of slower growth in the US. Consumer credit looks stretched and that is the signal from credit cards, where delinquency rates are elevated. August consumer credit is also due ahead of the weekend. Through July, it averaged about $13 bln a month this year. The average in the first seven months of 2022 was $29 bln and $18 bln in Jan-July 2021.

Canada also reports September employment figures. Through August, Canada has created 40.5k jobs a month (29.1k average in the first eight months of 2022). Of these positions, an average of 36k have been full-time. Relative to the size of its population, Canada's jobs growth has surpassed US. However, the unemployment rate has risen faster. It was at 5% from December 2022 through April 23. It rose to 5.5% in July and remained there in August. The median forecast in Bloomberg's survey is for it to have risen to 5.6%, reflecting a rise in the participation rate to 65.6% from 65.5% (the US participation rate is expected to be unchanged at 62.8%). The average hourly wage for permanent employees risen to 5.17% in August from 5.02% in July and 3.89% in June.

Investors had generally overlooked AMLO's policies in driving the peso sharply higher this year. However, with the peso falling, his policies contributed to the downside push. The government indicated it would change the formula for calculating prices for airport services (use of runways and leasing space for airlines, supplies and the passenger fee (TUA). Typically, this is negotiated every five years and updated twice a year to reflect inflation. However, the airline operators say this is the result of unilateral government action. Mexico's stocks fell sharply yesterday (~2.6%) with this sector particularly hard hit. The peso' slide accelerated with the dollar reaching MXN18.3750 before stabilizing. The overnight rate (11.25%) is prohibitively high to short. It may be the case that the stale longs are being forced out while buyers wait for some semblance of order to be restored. 

Canada unexpectedly reported a small trade surplus for August yesterday (C$0.72 bln vs. median forecast in Bloomberg's survey for a deficit of C$1.4 bln). Yet, the Canadian dollar was still lower on the day when European markets closed. However, the US dollar returned to yesterday's lows (~CAD1.3710) as it pulled back more broadly. It is also notable that the Canadian recovered even as oil extended its drop, which underscores a heuristic point that the Loonie is not a petro-currency. A convincing break of CAD1.3690 targets CAD1.3645 initially than then CAD1.3600. About $680 mln in options at CAD1.3665 expire today. The Mexican peso fell to a six-month low yesterday, settling off 1.6%. There was only one currency that did worse, the Colombian peso, which lost nearly 2%. As of yesterday, the Mexican peso had lost 4.5% of its value this week and the Colombian peso depreciated by about 6.5%. They are still the world's best performers this year (~6.9% and 11.6% respectively). While the US dollar pulled back from its peak near MXN18.3750, it still closed well above its upper Bollinger Band (~MXN18.11). The greenback slipped to slightly through MXN18.17 today but it is trading back above MXN18.20 in the European morning.   


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Marc Chandler
He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.
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