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USD/CAD: A Tale Of Two Labor Markets
Traders are still trying to digest last weeks US jobs report, but one thing is clear that The US labor market is outperforming Canadas labor market.
Markets are starting to settle into the traditional Dog Days of Summer trade, major indices, commodities and currency pairs seeing relatively little movement on the day ahead of tomorrows highly expected UC CPI report.
Traders are still trying to digest last weeks US jobs report, but one thing is clear: The US labor market is outperforming Canadas market. Whereas the US just saw its strongest job growth in five months, a new revolving low in its unemployment rate, and has fully recovered all of the job losses since the start of the pandemic, Canada has now seen two consecutive months of outright declines in full-time employment.
Central banks world wide remained hyper-focused on inflation, but an outright contraction in employment, especially against a backdrop of falling commodity prices and a slowing global economy, could certainly prompt some to slow or pause their tightening cycles. This now is the reality that the BOC has to wrestle with, presenting a possible bullish catalyst for the US dollar relative to the loosie.
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Weak US CPI, EUR/USD
It was the sort of movement which was needed. The most anticipated US inflation report lived up to expectations in terms of market impact as the dollar plunged and everything else went up, including all foreign currencies, gold ,BTC, and stocks. Among the majors, the EUR/USD has finally broken out of its tight consolidation phase, suggesting more short-term gains could in the days ahead, despite all the troubles for the Eurozone.
Driven by sharp declines in energy and gas prices, the 8.5% annual inflation read was relatively sharply weaker from 9.1% recorded in June. It is still uncomfortably high, but investors will take some comfort in that it was the first headline CPI reading that came below expectation in 11 months.
July was a strong month for employment, but not so strong for inflation, investors will look for signs on how the American consumers outlook is shaping on the economy and inflation prospects. Consumer sentiment will be in news on Friday. Thanks to soaring prices of everything from gas to food, consumer sentiment in US has been dropping rapidly in recent months, mirroring the situation in Europe and the rest of the world.
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Gold Loses Some Sheen as Hawkish Fed Outweighs Softer Inflation
Its been difficult for Gold to keep its bullish movement even though inflation data supporting the view that the Feds rate hikes are slow. Perhaps a bit of base and stability is needed for gold to gear up for a clean breakout above $1800.
After the soft CPI data and todays weaker than as it was expected PPI data added to the belief that inflation has reached its peak. As a result, US stocks initially expand their gains to three-month highs, before easing back.
Investors are betting that softening inflation will allow the Fed to increase interest rates less aggressively. We can also see bond yields rise with the 10-year breaking the high of 2.816%, with production rise with the 10 year breaking Wednesdays high of 2.816%, with the production in Europe also rising. This kept a cover on Gold and Silver, however the dollar did dell against most of the currencies-especially those risk sensitive commodity dollars.
Investors of Gold will be keeping a close eye on bond production. For as long as they dont rise too much then we should see the metal start continue to shine as it has done over the past 3 weeks.
Rebound in the production of bonds underscores uncertainty about the future path of inflation and interest rates. A couple of Fed officials have already said the Fed wants to see more evidence that inflation is on a down path. With odds of 75 basis point hike having dropped, the Fed is careful not to push too hard against that, but at the same time leave the door open for such an aggressive hike should incoming data from now until mid-September show another upsurge in prices or if employment once again probes to be very hot.
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JPY/NZD Weekly Fundamental Forecast: RBNZ Hike May do Little for NZD
JPY
Divergence is increasing on Yen future prices and market positioning. Yen is at its 24-year low, net-short exposure is at its least bearish level since March 2021. Over 27k gross shorts were closed over the past two weeks, with 8.5k gross longs added to it. Gross longs are also at their most bullish level since the pandemic. And this suggests that traders do not believe the Bank OF Japan will retain their ultra-easy monetary policy for as long as the central bank suggests. But it also means that prices could be too low relative to market positioning, or market positioning has jumped the gun and may need to reserve course. As divergences between prices and market positioning rarely last for too long.
NZD
NZD futures are on the cusp of flipping to net-long exposure for the first time since April. Admittedly it was only net-long for a single week but it does at least show the appetite to be short in almost non-existent, with net short exposure sitting at -276 contracts.
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August RBNZ Preview and what next for the NZD/USD
It is widely expected that the Official Cash Rate will be raised by 50 bp taking the cash rate to 3% in tomorrows meeting of Reserve Bank of New Zealand. It will be the RBNZs fourth consecutive 50bp hike in a tightening cycle that started in October.
RBNZ committed to make sure consumer price increase returns to within 1 to 3 percent target range last month and said that it would continue to increase rates on a speed to maintain price stability.
Despite a slight increase in the unemployment rate to 3.3% in second quarter of 2022 the labour market remains tight beyond the maximum sustainable level and inflation at 7.3% y/y is miles above target. The RBNZ will likely revise higher inflation forecasts and reiterate its forecast for a terminal rate of 3.9% by mid-2023.
The NZDUSD increased 3.4% last week to close above 0.6450 for its best week since June 2020. However, following the latest bout of dour Chinese economic data released yesterday, the NZD/USD has given back just under half of those gains to be trading at 0.6358.
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Bank Of Canada Inflation on its Peak
Bank Of Canada deputy governor said that obvious inflation is high but it is still far form being too high.
Despite CPI has fallen to 7.6% y/y from 8.1% and core CPI is down to 6.1% from 6.2% y/y, the Canadian dollar was higher on the day but it also depends on which metric we are looking at, as two out of the three inflation measures the BOCs prefer the increase. Common CPI hit the record high and also upwards from June.
Common CPI increased to 5.5% from 4.6%. CPI median rose to 5% from 4.9%y/y. CPI trimmed mean fell to 5.4%y/y from 5.5%. Core CPI increased to 0.5% m/m from 0.3%.
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GBP, Conservative Party Elections
The political backdrop, candidates and expected policies for traders to watch around next months UK Conservative Party leadership election, who will be the UKs next PM ?.
Traders generally overestimate the impact of political moves on market, however, politicians often have to water down their proposals to get them passed through the rest of the government apparatus and the majority of factors that drive markets on a day to day basis sit well outside the realm of politics. The bigger influence on markets is from International trade, monitory policy, supply chains, business confidence and complex interactions of millions of traders across the globe.
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EUR/USD Plunging Into Parity as US Dollar
Pair is moving around 1.0100-1.0270 channel for three weeks now. All attempts of the break through to its upper or lower border ended in failure. These attempts continued until 10th August after the publication of data on inflation in the US, the pair went up, turning the level of 1.0270 from resistance into Support. However, it was for a short while of two days and the pair returned to the channel, broke through its lower border on Thursday, and ended the week at 1.0039.
The dollar and the euro approached the equality level of 1.00000 again. The two reasons for the reversal of the pair are, drop in the markets risk appetites and inflation/energy crisis in Europe. The consumer price index rose there in annual terms crisis caused by the sanctions imposed on Russia because of its invasion of Ukraine.
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