USD Fails To Assume Direction After Employment Report

USD fails to assume direction after employment report

• The US labor market posted another month of solid employment gains in June, data showed on Friday. Nonfarm payrolls rose by 222k, much more than the forecast of 179k. Meanwhile, May’s print was revised up to 152k from 138k. The unemployment rate ticked up to 4.4%, missing its forecast of staying unchanged, but this is still a number consistent with full employment. The disappointment was wage growth, with average hourly earnings coming in below the forecast, while last month’s print was revised lower. As a result, the dollar tumbled somewhat, but quickly recovered its losses to trade more or less unchanged in the following minutes.

• Overall, these data are unlikely to change much within the divided FOMC in our view, as policymakers are still faced with the conundrum of a strong labor market, but lackluster inflationary pressures. As such, we think the greenback could trade in a consolidative manner over the next couple of days, as investors await for fresh data or new signals by the Fed. The next events that could dictate the currency’s forthcoming direction are Fed Chair Yellen’s semi-annual testimony on Wednesday (and Thursday) and subsequently, the CPI prints for June that are due out Friday. On balance, the CPIs may be more important for investors, as they could determine which of the two FOMC camps will prevail, the hawks or the doves.

• USD/JPY traded higher on Friday, breaking above the resistance (now turned into support) barrier of 113.90 (S1). The rate continues to trade above the short-term uptrend line taken from the low of the 14th of June, while on Friday, it cleared the longer-term downside resistance line taken from the peak of the 11th of January. Bearing these in mind, we would expect the pair to continue trading north and perhaps challenge the 114.40 (R1) barrier soon. A decisive break above that resistance is likely to open the way for our next obstacle of 114.90 (R2).

Solid Canadian jobs data boost the Loonie

• On Friday, we got employment data for June from Canada as well. The report was much stronger than expected, with the unemployment rate surprisingly declining and the net change in employment coming in much higher than anticipated. Combined with the strong GDP for Q1 and the robust retail sales for April, another strong employment report probably added further fuel to speculation that the BoC is likely to hike rates this week.

• However, despite the heightened market expectations with regards to a hike on Wednesday, we don’t share that view. We do expect the Bank to hike soon, but we think this week is too early. Even though the Canadian economy is strong, inflationary pressures are still missing. The nation’s core inflation rate tells the story, as it has declined for 3 consecutive months and now rests at +0.9% yoy. It would be very strange for the BoC to hike while underlying inflation is trending lower, in our view. As for the Loonie, it could continue to gain as we head into the meeting on expectations for a hike. However, if the Bank acts like we expect, CAD could reverse some of its latest gains.

• USD/CAD tumbled on Friday following Canada’s stellar employment report. The pair came under selling interest after it tested the psychological zone of 1.3000 (R2), to break below the support (turned into resistance) level of 1.2920 (R1). The decline was stopped at 1.2860 (R1). Given that the rate is trading below the 1.3000 (R2) zone, which acted as the lower bound of the sideways range that contained the price action since the 9th of September, we would consider the outlook to be negative. We would expect the rate to continue trading south, at least until Wednesday’s BoC meeting. A clear dip below 1.2860 (S1) is likely to initially aim for our next support of 1.2820 (S2), where another break is possible to target the 1.2770 (S3) zone.

As for the rest of the week:

• Today, the economic calendar is relatively light.

• On Wednesday, all eyes will be on the BoC rate decision, as we already outlined above. Meanwhile in the US, Fed Chair Janet Yellen will deliver her semi-annual monetary policy testimony before the House Financial Services Committee. In the UK, employment figures for May will be in focus.

• On Thursday, during the Asian morning, China’s trade balance for June is due out while during the European day, we get Sweden’s CPI prints for June.

• Finally on Friday, in the US the main event will be the release of CPI and retail sales data for June.