Welcome to another edition of Forex Friday, a weekly report in which we discuss selected currency themes mainly from a macro viewpoint, but we also throw in a pinch of technical analysis here and there.
In this week’s edition, we discuss the dollar after the US non-farm jobs report, and how this may impact the major currency pairs and gold. We also briefly look forward to the week ahead.
Dollar rebounds on strong wages data
The key takeaway from the US nonfarm payrolls report was the big rise in wage growth to the tune of 0.6% month-on-month, which was double the expected figure. In addition, the previous month saw an upward revision to 0.5%, instead of 0.4% initially report. The robust growth in wage inflation means there may well be second round effects of inflation on the economy, as people spend more, creating even more inflation, etc.
This goes against recent narrative that inflation has peaked. While that may well be the case, the Fed is not going to like the rising wage inflation. It may therefore hike rates for longer, even if the individual hikes are going to be relatively smaller than has been the case in more recent months.
The jobs report sent the dollar higher across the board before stalling as traders were not convinced ahead of the weekend. The greenback has nonetheless undone a bit of its recent weakness that had been driven by investors reducing their high expectations about the terminal interest rate in the US. Signs of inflation potentially peaking and the Fed speakers dialling down their hawkish rhetoric had sent everything higher in lieu of the dollar.
But as we keep on banging about it, people are forgetting that the Fed’s policy remains in contractionary mode. This is going to keep the downside risks limited for the dollar in the medium term.
Gold falls as yields bounce back
Big technical levels are coming into play now for the bond market, and so far, the US 10-year yield has held its own right where it should have – at previous resistance level of 3.50%.
Several FX majors contest 200-day MAs
A number of asset prices were already at, near, or slightly above their respective 200-day averages prior to the jobs report. Some interesting patterns are shaping up, although we will need to see how the markets will close the session before drawing any conclusion.
If yields refuse to break that 3.5% level, this should be negative for gold prices going forward.
The EUR/USD has turned lower, back below 1.05, after earlier testing waters above this handle. Bears still need to see a short-term lower low.
The USD/JPY was displaying a doji candle around the 200-day MA, potentially suggesting the selling is done – at least for now. Let’s see if it can now close above this important technical indicator.
Key macro events for next week
OPEC+ Meeting (Sunday, All Day)
This OPEC+ meeting takes place on Sunday as the group decides on the next phase of production policy – likely deeper oil output cuts – meaning there’s a risk oil prices might open with a big gap to start the new week. This comes as EU considers $60 price cap on Russian seaborn oil, as well as fears over weakening crude demand in China.
RBA Meeting (Tuesday, 03:30 GMT)
After 7 consecutive rate hikes, interest rates have now risen by 2.75% in Australia to 2.85%. The RBA is expected to continue its policy tightening and bump up the cash rate by another 25 basis points to 3.10%. However, market pricing is for a slightly smaller hike, due to weaker growth forecasts. So, we may get a 15-bps hike instead, to 3.0%.
BOC Meeting (Wednesday, 15:00 GMT)
At its last meeting, the BOC went against consensus by downshifting to a 50-basis point hike, lifting the overnight rate to 3.75%. Markets expect another 50-bps hike at this meeting to 2.45%, before potentially pausing as concerns rise about the risk from a falling property market in Canada and one of the highest household debt-to-income ratios in the world.
