“The dollar stood tall against rivals on Monday after the latest U.S. payrolls data indicated strong underlying wage growth, strengthening the case for more rate increases in 2017.” (Reuters)
It was a solid report with average hourly earnings up 10 cents or 0.4 percent which pushed the year-on-year increase in earnings to 2.9 percent, the largest gain since June 2009. We expect the dollar to firm on the commodity currencies and euro but see limited upside on the Japanese Yen.
In the US, we have a number of Fed speakers and expect a hawkish tone overall, while still saying rate rises will be gradual which is discounted by the market but we also have Donald Trump speaking on Wednesday on International trade and China and expect an agressive tone whcih could well unsettle the risk on mode in global markets.
“Trump’s plans for trade and foreign policy in particular are fraught with considerable threats to the real economy,” (Commerzbank currency strategist Thu Lan Nguyen)
The market will focused on Donald Trump on Wednesday, where his views on global trade and China will be carefully monitored and we expect a tough stance which will undermine the risk on mode in the markets. In addition figures out over the weekend showed China’s foreign exchange reserves fell to nearly six-year lows in December as Beijing fought to stem an outflow of capital by supporting the Yuan – we see this as a losing battle and expect a devaluation. Global stocks are overbought and we expect a sell off which will firm the safe haven JPY.
They are and we expect nervousness to cause a move to risk off in the coming week. While we are bullish the dollar long term on most majors the Yen looks set to firm. While the dollar retraced much of its losses on Friday to trade back at 117.00 – we see the rally as as sell. The JPY is oversold technically and any movbe to risk off should firm it.
GBP/USD fell against the dollar and the euro, in reaction to comments from UK Prime Minster Theresa May’s comments about leaving the EU were taken as the country could face a “hard Brexit” without access to the single market when it leaves the European Union.
There will be a deal done though which is in the interests of both the UK and EU – so concessions on both sides and the sell off in our view is a buy.
The fears of a hard BREXIT are overdone and when the UK does leave both the UK and EU will compromise – its not in the interests of either party to have an acrimonious split. In terms of creating risk off, the Chinese efforts to stem the Yaun’s fall on the dollar has not lasted long and USD/CNH has moved back up strongly in the last couple of days:
“The problem is the continuous outflow of capital will persist. It’s structural in nature and that’s going to burn the currency,” (Dominic Schnider UBS Wealth Management)
The Chinese will soon give up trying to hold the Yuan up and just devalue it – its simply a matter of time as outflows are not going to slow up.