The twin upbeat jobs reports from the US and Canada on Friday underscored the momentum in the global economy and that shouldn't be lost in all the confusion about inflation. The US dollar was the top performer last week thanks to Friday's strong performance, while NZD, USD and GBP were bunched up at the bottom of the pack. The RBNZ decision is on Wednesday, drawing attention to any fresh jawboning. It's a holiday in Australia and Canada to start the week.
There is a temptation to lump together economic growth data and inflation. Historically, growth brings inflation and pushes interest rates higher. It's the backbone of economics 101. But that ignores the secular forces at work that are the real story. Globalization, automation, de-unionization and an excess of highly educated workers are deflationary drivers no matter if it's a recession or a growing economy. Central banks are slowly beginning to grasp it.
What's equally true is that many of those who are overly focused on inflation are missing the growth story. The US added another 209K jobs in July and Canada added 35K more full time jobs. There are jobs out there and it's a good environment for business.
Inflation and interest rates are a huge driver in the FX market but they're not the only driver. Growth is still a net positive and even if the US economy doesn't create any wage growth for 3 years, the dollar could still be the place to invest if growth is closer to 3% than 2%.
Commitments of Traders
Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.
EUR +83K vs +91K prior JPY -112K vs -121K prior GBP -29K vs -26K prior CHF -1K vs -2K prior AUD +61K vs +56K prior CAD +41K vs +27K prior NZD +35 vs +35K prior
The only sizeable shift was in the Canadian dollar and that combined with the lack of gains in the past week, make is wonder if the trade is overcrowded and due for a pullback. The US dollar side is a wildcard but if it can get any momentum, all the above currencies in a + position are vulnerable.