Fundamentals and geopolitics to share spotlight on US jobs week
The USD was on a rollercoaster in the last week of November as the optimism surrounding the Senate tax reform bill was quickly eclipsed by the news that former National Security Adviser to the White House was prepared to testify that the Trump team directed him to contact Russian operatives. The US dollar is now mixed on a weekly basis against major currencies with an eye on more developments on the political front and the release of employment data in the US.
The Bank of Canada (BoC) will release its benchmark rate statement on Wednesday, December 6 at 10:00 am EST. The central bank is anticipated to keep rates unchanged at 1.00 percent after already hiking twice in 2017. Canadian jobs data defied estimates and gained 79,500 jobs in November raising the probability of the next Canadian interest rate hike coming sooner rather than later, but the data will not influence the decision on Wednesday.
The U.S. Bureau of Labor Statistics will release the non farm payrolls (NFP) report on Friday, December 8 at 8:30 am EST. The US economy is forecasted to have added 200,000 positions in November. Once again the emphasis will be on average hourly wages for signs on inflationary pressure. While the market has already priced in a rate hike of 25 basis points in the next Fed meeting doubts remain on what the central bank will do in 2018. Weak inflation is the biggest argument the doves within the FOMC have used to debate waiting before raising rates again. Wages are forecasted to have gained 0.3 percent in the last month after a flat reading in October.
The EUR/USD lost 0.31 percent in the last five trading days. the single currency is trading at 1.1895 on Friday after geopolitical risk factors have put downward pressure on the dollar. The EUR was on a falling trend at the beginning of the week as the US tax reform in the US Senate was gathering momentum. The revelations that Michael Flynn would testify in the special counsel investigations on Russian collusion in the US presidential elections rocked the dollar and the stock market. The named thrown around in connection to Flynn and the Trump team is Jared Kushner.
The possible reversal of fortune on the Senate bill that is now facing more scrutiny as the crowdsourced efforts asking for more transparency could end up derailing the much awaited tax reforms. The tax reform bill is close to a vote and could pass as long as Republicans maintain a united front.
Trump took to twitter to also deny that Secretary of State Rex Tillerson has not been fired despite having differences, although he did tweet that he (Trump) calls the shots.
The first full week of December will be a quiet one for European releases, with the EU-UK Brexit negotiations taking the top spot. In the US the calendar will be focused on jobs data with the release of the ADP, unemployment claims and the heavyweight indicator, the U.S. non farm payrolls (NFP) to be released on Friday, December 8. Employment data is expected to remain strong and lead the way to the Fed meeting where it is expected they will announce their third interest rate hike of the year on December 13.
The GBP/USD gained 0.99 percent this week. The Pound is trading at 1.3470 on the back of a softer Brexit optimism. The upwards weekly move has not been one directional. The GBP is weaker on Friday as the European Union went on the record and stated that if Ireland cannot accept the UK's offer for its border then trade negotiations with the single market will not move to the next stage. The deadline for a border proposal is Monday and faced with the solidarity of the EU, Ireland holds the fate of the UK in its hands. The Irish border became a show stopping issue after the disastrous snap election results forced British Prime Minister Theresa May to partner with the Northern Irish Democratic Unionist Party (DUP). The DUP demand Northern Ireland be treated the same as the rest of Britain, not left behind in half EU, half UK.
The EU's backing of Ireland in the border issue puts more pressure on May and her government with the worst case scenario being the end of her rule. Cable touched daily lows at around 1.3640 despite strong manufacturing PMI data in November as Brexit negotiations are eclipsing fundamental data.
Gains on Purchasing Manager Indices in construction (Monday, December 4 at 4:30 am EST) and services (Tuesday, December 4 at 4:30 am EST) alongside an expected slowdown in manufacturing production prices in the United Kingdom are on the agenda for the week of December 4 to 8.
Oil surged on Friday as the decision by the Organization of the Petroleum Exporting Countries (OPEC) and Russia to extend its production cut agreement by 9 months combined with geopolitical risks being elevated in the US after the news broke that Michael Flynn pleaded guilty to lying to the FBI. West Texas Intermediate is trading at $58.12 and is almost back to the price levels where it opened on Monday.
The fact that the OPEC announcement was expected and already priced-in exacerbated market reactions to rumours about the duration and doubts that Russia will sign on for the full 9 months. Despite a positive move on the day of the announcement, a strong dollar led by tax reform optimism on Thursday put the price of energy at weekly lows.
Despite the united front shown in Vienna between the OPEC and other major producers, most notably Russia, there are various calls within the bloc to look for an exit strategy. Russia is keen to get back to full production, but for now will seek stability than profits. Nigeria and Libya who were exempt from the original production cut have now been limited to not exceed the levels from this year as compliance within the group will be a challenge.
US shale producers continue to ramp up production and free from weather disruptions will put pressure on crude prices that have been boosted by the effort put forth by the OPEC. The technology advances that made oil extraction cheaper created a sudden drop in prices as the OPEC sought to price them out of the market in a strategy that backfire by exchanging market share for profits.
Diplomatic stability within the producers organization will prove to be difficult as Saudi Arabia has taken a more aggressive role in domestic and regional politics which could pit it against number two and three producers Iraq and Iran.
The USD/CAD lost 1.55 percent on Friday. The currency pair is trading at 1.2695 after the Canadian jobs number defied expectations with a 79,500 positions added in November. Monthly gross domestic product (GDP) came in higher at 0.2 percent but in fact confirmed the slowdown of the economy as the third quarter saw an expansion of 1.7 percent and a downward revision to the second quarter data to 4.3 percent. The Canadian economy grew a bit less than expected by the Bank of Canada (BoC) who had forecasted a 1.8 percent gain but beat the economist forecast of 1.6 percent. The number did validate the effective cool down of growth in Canada which puts the central bank on a more wait and see approach despite the solid gains seen in employment.
The loonie was on the back foot for most of the past week with the USD gaining 1.53 percent in the last 4 days on the market optimism that the Trump Administration could score a victory. Expectations of a rate hike by the U.S. Federal Reserve in December are high, and already priced into the pair, but the Bank of Canada (BoC) is seen more dovish by the minute. A new Reuters survey of 30 economists shows that there is little expectation of a rate move by the Canadian central bank in December, and a third see April at the earliest.
Factors such as the precarious state of the NAFTA renegotiations and evidence of the economy slowing down have cooled the BoC's desire to reduce further stimulus worried about the effect of higher interest rates on borrowers that hold record high levels of debt. The two data releases on Friday could confirm the headwinds facing the loonie, or in case they over perform expectations give the currency a boost against the US dollar.
Market events to watch this week:
Monday, December 4
- 4:30am GBP Construction PMI
- 7:30pm AUD Current Account
- 7:30pm AUD Retail Sales m/m
- 10:30pm AUD Cash Rate
- 10:30pm AUD RBA Rate Statement
Tuesday, December 5
- 4:30am GBP Services PMI
- 8:30am CAD Trade Balance
- 10:00am USD ISM Non-Manufacturing PMI
- 7:30pm AUD GDP q/q
Wednesday, December 6
- 8:15am USD ADP Non-Farm Employment Change
- 10:00am CAD BOC Rate Statement
- 10:00am CAD Overnight Rate
- 10:30am USD Crude Oil Inventories
- 7:30pm AUD Trade Balance
Thursday, December 7
- 8:30am USD Unemployment Claims
- 11:00am EUR ECB President Draghi Speaks
Friday, December 8
- 4:30am GBP Manufacturing Production m/m
- 8:30am USD Average Hourly Earnings m/m
- 8:30am USD Non-Farm Employment Change
- 8:30am USD Unemployment Rate
*All times EDT