USD Lower After Lacklustre Job Report

News and Events:

USD tumbles as real wages dip into negative territory

The US dollar had a tough start into the week as investors remained unmoved after Friday’s job report and even appeared disappointed amid lacklustre data. The US economy created 235k private jobs in February, widely beating the median forecast of 200k, while the previous month’s reading was upwardly revised to 238k. All employment measures improved in February as the unemployment rate eased to 4.7% as participation climbed to 63%. The U-6 measure or the underemployment rate fell to 9.2% from 9.4% a month previous. So, after such a bullish report how come the USD came under pressure this morning?

Well, there are a few explanations for this. Firstly, wage growth clearly failed to impress despite the solid pace of job creation as average hourly earnings grew 0.2%m/m versus 0.3% expected. Indeed, inflation pressures have intensified over the last few months as crude oil prices recovered – the consumer price index reached 2.5% in January. However, nominal wage growth remained stable, which translates into weaker purchasing power for the common American. Looking at how the measure adjusted for inflation, one immediately notices that real wages contracted 0.52%. This is the first time since December 2013 that the gauge has dipped into negative territory. In fact, since December 2015 real wage growth has started to decelerate and actually contracted last month. This negative trend could explain why the Fed was not in such a hurry to raise rates last year. Looking forward, it should not influence Wednesday’s meeting as Janet Yellen cannot take the risk of disappointing the market, especially after selling that rate hike for the past few months. However, it will definitely impact the Fed’s tightening path as the Fed will find itself on the hot seat. On one hand, it will have to control rising inflationary pressures, although the core measure remains stable; while on the other, if the Fed adds too much pressure too quickly on the economy, by increasing borrowing rates, it will slow – if not reverse – the current fragile recovery.

All in all, in the short-term the market will stay focussed on the mounting political risk in Europe, which would help the dollar to hold ground. The dollar’s medium-term outlook is heavily dependent on the results of the EU political elections; however, should the political chessboard stay unchanged, the USD will start to reverse gains.

Brexit: Will Article 50 be triggered this week?

As Brexit proceedings drag on and fears of a hard Brexit continue to loom large, the pound continues to paint a very vivid picture of market worries. At present, UK Parliament remains split on PM May’s EU exit plans with The House of Lords meeting today to debate its proposed amendments.

The outcome however will be of little relevance as May will plough on and trigger Article 50 as planned. From that point, Britain’s EU divorce will take up to two years to complete but in our view, likely much longer as the UK will surely negotiate bilateral agreements. The question on everyone’s lips right now of course is whether the PM will cut the cord with no actual deal in place.

Currency-wise, the pound has been feeling the heat from both the single currency and the greenback over the past couple of weeks on the back of renewed hard Brexit fears. In our view, we believe that there is a strong opportunity to reload bullish pound positions. In our view, the dragging out of these proceedings will be more damaging than the actual exit itself. Brexit will not be the promised apocalyptic nightmare and will allow the UK breathing space to regain its competitive stance, free from constraint from Brussels.

Today’s Key Issues (time in GMT):

• Jan Trade Balance ex Ships, last 6.9b, rev 7.9b DKK / 08:00
• Jan Current Account (Seasonally Adjusted), last 19.7b, rev 21.5b DKK / 08:00
• Bank of Italy Governor Visco Attends Foreign Office Conference EUR / 08:30
• mars.10 Total Sight Deposits CHF, last 553.4b CHF / 09:00
• mars.10 Domestic Sight Deposits CHF, last 471.5b CHF / 09:00
• Jan Industrial Production NSA YoY, last 3,40%, rev 3,50% EUR / 09:00
• Jan Industrial Production WDA YoY, exp 3,20%, last 6,60%, rev 6,80% EUR / 09:00
• Jan Industrial Production MoM, exp -0,80%, last 1,40% EUR / 09:00
• ECB’s Villeroy De Galhau speaks in Paris EUR / 10:15
• ECB’s Liikanen Speaks at Seminar on Rome Treaty in Helsinki EUR / 11:00
• Central Bank Weekly Economists Survey (Table) BRL / 11:25
• TCMB Turkey Survey of Expectations TRY / 11:30
• ECB Board Member Sabine Lautenschlaeger Speaks in Dublin EUR / 12:45
• 2Q Manpower Survey, last 15% NZD / 13:01
• 2Q Manpower Survey, last 8% AUD / 13:01
• ECB President Draghi opens conference in Frankfurt EUR / 13:30
• mars.10 Bloomberg Nanos Confidence, last 57,4 CAD / 14:00
• Feb Labor Market Conditions Index Change, exp 2,5 USD / 14:00
• ECB Vice President Constancio chairs panel in Frankfurt EUR / 14:00
• ECB Publishes Weekly QE Holdings EUR / 14:45
• Bank of England Bond Buying Operation (Reinvestment) GBP / 14:50
• ECB’s Praet chairs panel in Frankfurt EUR / 16:30
• mars.12 Trade Balance Weekly, last $697m BRL / 18:00
• Feb Export Price Index MoM, last 1,10% KRW / 21:00
• Feb Export Price Index YoY, last 7,40% KRW / 21:00
• Feb Import Price Index YoY, last 13,20% KRW / 21:00
• Feb Import Price Index MoM, last 2,10% KRW / 21:00
• RBA’s Bullock Speech at Bloomberg, Sydney AUD / 21:30
• 4Q BoP Current Account Balance, exp -$12.00b, last -$3.40b INR / 22:00
• mars.12 ANZ Roy Morgan Weekly Consumer Confidence Index, last 113,9 AUD / 22:30
• Feb Foreign Direct Investment YoY CNY, exp -4,20%, last -9,20% CNY / 23:00
• Feb Budget Balance YTD, exp -350.0b, last -23.4b RUB / 23:00
• Feb Tax Collections, exp 93663m, last 137392m BRL / 23:00
• ECB President Mario Draghi Speaks in Frankfurt EUR / 23:00

The Risk Today:

EUR/USD continues to strengthen. Hourly resistance given at 1.0679 (16/02/2017 high) has been broken while hourly support at 1.0493 (22/02/2017 low). The technical structure suggests deeper consolidation towards 1.0500. In the longer term, the death cross late October indicated a further bearish bias. The pair has broken key support given at 1.0458 (16/03/2015 low). Key resistance holds at 1.1714 (24/08/2015 high). Expected to head towards parity.

GBP/USD continues to edge lower despite ongoing consolidation since the pair has broken support given at 1.2254 (19/01/2017 low). The road is wide-open for further decline. Hourly resistance is now given at 1.2300 (05/03/2017 high). The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.

USD/JPY is pushing higher towards key resistance given at 115.62 (19/01/2016 high). Hourly support can be found at 113.56 (06/03/2017 low). We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).

USD/CHF is still riding within uptrend channel and is on its way to monitor hourly support implied by lower bound of the uptrend channel. Key resistance is given at a distance at 1.0344 (15/12/2016 high). Expected to consolidate. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.