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US Dollar Offered Ahead of Employment Data after US 10-year Yield Set New Low for the Year

US Dollar Offered Ahead of Employment Data after US 10-year Yield Set New Low for the Year

Overview: The dollar is offered ahead of today's US jobs report, even though expectations are for solid if not spectacular jobs growth of around 185k. The Australian and New Zealand dollars are leading today's move, while the euro approached $1.09, which it has not traded above this week. Sterling neared the lower end of its $1.26-$1.28 trading range yesterday and set a new high for the week today, slightly above $1.2770. Emerging market currencies are mostly firmer as well, with the Turkish lira, South African rand, and a couple central European currencies bucking the move.

Gold is consolidating in a narrow range above $2052 after approaching a one-month high near $2065 yesterday. March WTI fell by a little more than 5% of the past two sessions and has stabilized today after slipping to about $73.65. It is still off 4.5% on the week, which if sustained, would be the largest weekly loss since early October. Chinese stocks swung dramatically today, and despite some reports of offshore buying and the approval of a new games, the CSI 300 settled at new five-year lows. Other large bourses in the region rose, led by South Korea's Kospi. which advanced by almost 3.0%. Europe's Stoxx 600 snapped a six-day advance yesterday but returned to the winning side today. It has recouped yesterday's loss in full and is near its best level since early 2022. US equity indices are trading higher, helped by favorable earnings by Meta and Amazon. Yesterday's US bond rally helped ignite an advance in the Asia Pacific region today, but European benchmark yields are mostly 1-2 bp firmer today, with 10-year Gilt yields rising nearly six basis points. The 10-year US Treasury yield is flattish around 3.88%. Yesterday, the yield, which began the week near 4.14% fell almost 3.81%, the lowest since late December.  

Asia Pacific

The week ending with a quiet news stream from the Asia Pacific region. The Topix Bank index slipped a bit further today after falling nearly 0.85% yesterday after Aozora warned of losses emanating from the US commercial real estate market. It fell further today to bring the two-day drop to about 33%. The perceived likelihood of a BOJ rate hike next month diminished slightly but the odds of an April hike crept up to a new high since late December. Still, consumption and production in the world's third-largest economy is struggling to sustain upward momentum. Soft CPI and disappointing real sector data encouraged the market to bring forward a rate cut be the Reserve Bank of Australia. At the end of last week, the futures market was pricing in about a 37% chance of a May cut. That has increased to nearly 70% now. A week ago, the market thought a June hike was a 50/50 proposition and now it is nearly fully priced into the futures strip. Both Japan and Australia report the final service and composite PMI on Monday. China sees Caixin's service and composite PMI on Monday, as well. 

Shortly after the US 10-year Treasury yield recorded the low for the day (~3.81%), the dollar found a bottom slightly below JPY146.00, to record a 2 1/2-week low. It recovered but could not resurface above JPY146.50. It found support a little lower, near JPY146.25 in early local trading today and set the session high near JPY146.80. The JPY147.00-10 offers resistance. There are options for $1.4 bln at JPY146 that expire Monday. A convincing break of JPY146.00, which could be sparked by a disappointing US employment report, would target the JPY144.70-JPY145.00 area. After falling by 0.5% to close out January, the Australian dollar was tagged for nearly 1%, before it staged an impressive recovery. It had set a new low for the year slightly below $0.6510 before recovering to new session highs (~$0.6580) on the back of a broader US dollar pullback. Follow-through buying is lifting it above $0.6600 in the European morning. A close above $0.6615-25 lifts the technical tone into next week. We suspect that the hemorrhaging of Chinese equities makes officials even more determined to have a stable exchange rate. Chinese officials have managed to keep the yuan's exchange rate against the dollar inside last week's range (~CNY7.1440-CNY7.1975). This week's range has been roughly CNY7.1675-CNY7.1845 and today's range was exceptionally tight ~CNY7.1770-CNY7.1810). The PBOC set the dollar's reference rate at its lowest for the week (CNY7.1006) and the average projection in the Bloomberg forecast was also the lowest this week (CNY7.1610). The difference between the two was the narrowest this week. 


The swaps market reflects a perceived increase in the likelihood that the ECB cuts rates in April. While ECB President Lagarde pointed to a midyear move, the market was not persuaded. On the eve the of ECB meeting on January 25, the swaps market saw about a 65% chance of a hike in April. It stands a little below 90%. The market has discounted about 138 bp of ECB cuts this year, slightly lower than before the ECB meeting. Turning to the Bank of England, the market had around a 77% chance of a May cut discounted before yesterday's meeting. It fell to almost 61% yesterday and has eased to about 55% today. A May cut was fully priced in as recently as January 12. The market anticipates around 108 bp in cuts this year, which a few basis points higher than a week ago. 

Yesterday, the euro staged its most impressive rally of the year. It had been sold to new lows (~$1.0780) since mid-December and proceeded to recovery to approach $1.0880 in the NY mid-afternoon. It posted the highest settlement of the week (~$1.0870). Follow-through buying today has seen in edge closer to $1.09. The euro has slipped below $1.08 three-times this week and has found good buyers each time. We had anticipated that a new euro low could mark the end of the leg lower that began at the start of the euro. The $1.0900-20 area may offer the initial hurdle, and then $1.0960-$1.1000. Sterling was nearly as impressive. After falling to two-week lows near $1.2625, sterling was lifted initially with the help of a Bank of England. It was worth about half-of-a-cent. After consolidating for a couple of hours, sterling jumped higher on the greenback's broad pullback to briefly trade above Wednesday's high (~$1.2750). It remains firm today and set new session highs slightly above $1.2770 in the European morning. Sterling has not settled above since the end of last July. 


Federal Reserve Chair Powell acknowledged at the post-FOMC press conference that an unexpected deterioration in the labor market would likely change the calculations and help boost the officials' confidence that would allow an earlier rate cut, after he pushed against expectations of a March move. Powell recognized that the labor market is slowing but still described it as strong. He cited the three-month average jobs growth of 165k. That is the lowest average for a three-month period since January 2021. Recall that in Q4 19, before the pandemic the US created almost 150k jobs a month. Powell suggested the labor market was almost back to normal, though not quite. The BLS will unveil its annual revisions to both the establishment and household survey over the past two years, and the risk is job gains are revised lower. Still, the median estimate in Bloomberg's survey has crept up in recent days to stand at 185k.

The unemployment rate may tick up to 3.8% after holding at 3.7% in November and December. It had been at 3.8% from August through October after bottoming at 3.4% earlier last year. A 0.3% increase in hourly earnings will keep the year-over-year rate at 4.1%. We learned in recent days that the Q4 23 Employment Cost Index eased to 0.9%, the smallest quarterly increase since Q2 21. However, what ultimately matters are labor costs in the context of productivity. Unit labor costs for Q4 23 were reported yesterday. They rose by 0.5%, about half of the expected pace, and it follows a revised 1.1% decline (initially -1.2%) in Q3 23. That is to say, the increase in labor costs in H2 23 was more than offset by the increase in productivity.

The US dollar met a wall of sellers yesterday around CAD1.3460 that drove it back to CAD1.3370 before steadying. Although it held Wednesday's low (~CAD1.3360), the price action keeps the bearish technical scenario intact. It has made a marginal new low today near CAD1.3365. A break of CAD1.3360 could signal losses into the CAD1.3300-10 area next. Note that the 60-day correlation of the changes in the exchange rate and in the S&P 500 is near its highest (0.55) since March 2023. The US dollar posted a bearish outside down day against the Mexican peso by trading on both sides of Wednesday's range and settling below its low. The greenback peaked in early North American turnover near MXN17.2855 and trended steadily lower to almost MXN17.07. It settled below the 20-day moving average (~MXN17.0865) for the first time in two weeks. It has approached MXN17.05 area today and a break may spur more dollar selling. Mexico's central bank meets next week, and while pressure is building for a rate cut, we expect Banxico to wait another month. 


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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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