Friday jobs report sent the U.S. dollar to 7-month high last week as yields on 2 year bonds rose to highest level in five and half years.
U.S. nonfarm payrolls did not only beat all analysts’ expectations range of 135,000 – 240,000 but also printed the highest number in 2015, providing fed officials a solid justification to raise rates for the first time in almost a decade. Not only had the headline number beat, but also the other employment component releases signalled a healthier U.S. economy than previously anticipated. The unemployment rate dropped to the lower range bound the Fed set as full employment of 5.0 – 5.2% for the first time since May 2008. The figure we consider of same importance to the headline is growth in wages, which grew 0.4% in October from September to bring the annualized increase to 2.5%, an indication that inflation could be returning soon.
Markets now are pricing a 70% rate hike in December from 54% before the release of the jobs report, providing further room for the dollar rally if data from the U.S. continued to improve. Next week’s U.S. economic calendar is light but whether the extraordinary jobs figure will be reflected in consumers behaviour, will get to know the answer in Friday’s retail sales release. Consumer spending generates about two third of the U.S. economy and a pick-up in October will provide dollar bulls a reason to continue riding the uptrend wave. Economists expects that retail sales will advance 0.3% in October from 0.1% the month earlier, and core-retail sales which excludes automobile and gasoline to climb 0.4%. Meanwhile, a gauge of consumer sentiment, which is also due to release on Friday, is projected to rise 91.1% in November from 90 the previous month.
Traders will also tune in to speeches from Charles Evans, William Dudley and Jeffery Lacker who are all voting members of the FOMC and likely to raise the bar for a Fed rate hike in December.
If we turn our attention to the other part of the world, there is a reason to be worried as China’s trade figure disappointed by a wide range today, reinforcing views who are calling for more stimulus. October exports fell 6.9% while imports dropped 18.8%. Easing from ECB and BoJ not reflected positively yet in imports as Chinese shipments to European Union dropped 2.9% and dropped 7.7% to Japan. With all major central banks worried about developments in emerging markets, specifically China, the released trade figure today is just another reminder of how divergent monetary policies are likely to continue between the U.S. and other major central banks. Pressure on commodity currencies likely to resume with AUD to be affected the most by the Chinese data.
The EURUSD closed Friday at lowest level since 23 Apr of this year and the only technical support can be found around 1.0450 – 1.0520. ECB’s Draghi already hinted for easier monetary policy, and if Friday’s euro area Q3 GDP figure disappointed, the EURUSD parity call voices will go louder.
After slipping more than 3% from last week’s high, GBPUSD will be on traders monitor screen. The pound not only declined on Friday’s non-farm payrolls report strength, but also on BoE dovishness which signalled no rate hike to take place in 2016. According to latest PMI releases, employment conditions improved in all major sectors and if this is not mirrored in Wednesday employment report, we expect the GBP to trade below 1.5 psychological level.