EUR/USD: Strong but short-lived reaction to widely-expected Italian referendum result
- The U.S. unemployment rate fell to a nine-year low of 4.6% in November, as employers added another 178k jobs, making it almost certain that the Federal Reserve will raise interest rates later this month. The market had forecast payrolls rising by 175k last month and the unemployment rate remaining unchanged at 4.9%. Average hourly earnings fell three cents, or 0.1%, after rising 0.4% in October and gaining 0.3% in September. Average hourly earnings fell for workers in mining, manufacturing and utilities in November.
- Job gains have slowed from an average of 229k per month in 2015 to an average of 180k this year as the labor market nears full employment. Still, the monthly increases are more than enough to absorb new entrants into the labor market. Fed Chair Janet Yellen has said the economy needs to create just under 100k jobs a month to keep up with growth in the working-age population. The jobs report added to data on consumer spending, the housing market and manufacturing in suggesting the economy continued to gain momentum in the fourth quarter after output rose at its fastest pace in two years in the third quarter.
- The dollar softened on Friday as investors took profits from its recent gains following solid but unspectacular U.S. non-farm payrolls data for November. The EUR recovery was stopped by surprisingly strong reaction to Italian constitutional referendum result.
- Italian Prime Minister Matteo Renzi is set to resign on Monday after suffering a crushing defeat on Sunday in a referendum on constitutional reform. The result had been widely expected, though the size of the "No" vote, at with 59.1%, was more emphatic than had been forecast.
- Renzi's resignation could open the door to early elections next year and to the possibility of an anti-euro party, the opposition 5-Star Movement, gaining power in the heart of the single currency
- The EUR/USD tumbled in Asian trade to hit 1.0505, its weakest since March 2015. But it had recovered almost all of those losses and in the morning of the European session the rate was back near 1.0650. Our EUR/USD long position hit the stop-loss. But we used this drop to take profit on our EUR/GBP short and to open EUR/JPY long.
- We think that the bear cycle is waning on the EUR/USD and expect a recovery to be continued. Long lower shadow on today’s candlestick reinforces our bullish view. We opened another EUR/USD long with the target at 1.0840.
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USD/CAD: Canadian jobs report beat market expectations
- The jobless rate in Canada declined to 6.8% in November of 2016 from 7.0% in the previous three months, beating market expectations of 7.0%. It is the lowest unemployment rate in five months as the economy added 10.7k jobs and fewer people looked for work. Part-time jobs rose by 19.4k while full-time decreased by 8.7k.
- We expect the CAD to outperform other commodity currencies as it has lagged over the past few months, and fundamentals suggest the currency is considerably undervalued. With oil production recovering steadily after a drop in the second quarter of 2016, the BoC is unlikely to become more dovish at its upcoming meeting.
- We see plenty of appreciation potential for the CAD over the coming quarters. We keep our short-term bearish USD/CAD position and consider opening a short position in the long-term part of our portfolio soon.
