To what extent did the hurricanes impact the US labor market?
- In the US, all eyes will be on the all-important US employment report for September. The forecast is for nonfarm payrolls to have risen by 90k, less than the 156k in August. Even though this number appears to be low at first glance, most of the softness may be attributed to the hurricanes that plagued the US. In addition, the risks surrounding the forecast may even be tilted to the upside if one trusts labor-market gauges. The ADP print came in at 135k, while the employment sub-indices of both the ISM PMIs rose, indicating accelerating jobs growth.
- As for the rest of the report, the consensus is for the unemployment rate to have held steady, while average hourly earnings are expected to have accelerated on a monthly basis. Overall, this appears to be yet another set of decent employment data, something that could amplify further speculation for a December rate hike by the Fed and thereby, bring USD under renewed buying interest. Our favorite proxy for potential dollar gains today is USD/CAD, considering that Canada’s jobs data are anticipated to be on the soft side (see below).
- USD/CAD surged yesterday after it hit support near the short-term uptrend line taken from the low of the 15th of September. At the time of writing, the rate looks to be headed for a test near the 1.2600 (R1) resistance line, where a decisive break may set the stage for extensions towards the crossroads of the 1.2660 (R2) barrier and the longer-term downtrend line taken from the peak of the 5th of May. A decent US employment report today combined with a soft Canadian one may be the trigger for another leg higher. Having said that though, we prefer to wait for a clear close above the aforementioned crossroads before we get confident on larger bullish extensions. Something like that would confirm the positive divergence between our daily oscillators and the price action and may be an early sign of a medium-term trend reversal.
Sterling takes a beating as political uncertainty mounts
- The British pound plunged yesterday, following rumors that PM Theresa May is considering resignation. Even though a statement from the PM’s office later denied this, sterling did not manage to recover its rumor-related losses. It appears that PM May is facing leadership challenges from within her own party, with media reports suggesting that a number of Conservative MPs are calling for her to resign, albeit not publicly.
- These developments confirm our prior view that as investors focused on the prospect of a BoE rate hike, they began to overlook the considerable political risks surrounding the UK. Coming on top of the lack of progress in the Brexit negotiations, this increase in domestic political uncertainty may keep the pound under pressure for a while, we think. A potential rate hike by the BoE could offset some of the negative reaction in GBP, but given that a hike by year-end is almost fully priced at this point, we believe that politics are likely to overshadow economics, at least in the near-term. Having said that, we will keep an eye out for comments from BoE’s Haldane today, as he was quite hawkish when he last spoke, indicating that a rate hike in the UK would be “a good news story”.
- GBP/USD collapsed yesterday following the reports that PM May is considering to resign. The pair fell below the upside support line drawn from the low of the 24th of August and broke three support (now turned into resistance) lines in a row. Currently, the rate is trading slightly below the 1.3100 (R1) hurdle, and given that the price structure remains lower peaks and lower troughs below the short-term downtrend line taken from the peak of the 20th of September, we would expect more downside extensions, perhaps towards our next obstacle of 1.3030 (S1). Even if the pair rebounds on any hawkish comments from Haldane, as long as such a recovery remains limited below the aforementioned short-term downtrend line, we would treat it as a corrective phase.
- Switching to the daily chart, we see that the latest short-term reversal came after the rate tested the long-term downtrend line taken from back at the highs of July 2014. This enhances our view that the rate is poised to continue trading south for a while, perhaps for a test near the upside support line taken from the low of the 6th of October.
As for the rest of today’s highlights:
- As we already noted, besides the US jobs report, we get employment data from Canada as well. Expectations are for the unemployment rate to have ticked up, and for the net change in employment to have declined, but to have remained in positive territory.
- We have three speakers on the agenda. In addition to BoE MPC member Andy Haldane, we will hear from New York Fed President William Dudley and Atlanta Fed President Raphael Bostic.
Support: 1.2535 (S1), 1.2430 (S2), 1.2335 (S3)
Resistance: 1.2600 (R1), 1.2660 (R2), 1.2750 (R3)
Support: 1.3030 (S1), 1.2980 (S2), 1.2900 (S3)
Resistance: 1.3100 (R1), 1.3180 (R2), 1.3230 (R3)