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There was a great amount of important economic data releases today. In the US, the key focus was on the non-farm payrolls jobs report, while the unemployment rate and average earnings growth were also of significant interest. Disappointing UK industrial and manufacturing production for May have been dictating sterling movements during the European trading session.

The much-anticipated jobs report today showed a gain of 222,000 jobs in the US economy for June, which followed a revised 152,000 expansion in May and beat forecasts for a gain of around 179,000 jobs. However, the wage growth came in below the expectations. Average hourly earnings increased by 0.2% month-on-month, following a downwardly revised 0.1% rise in May, but below the expected 0.3%. On a yearly basis, wages grew 2.5% in June. Meanwhile, the unemployment rate inched up to 4.4% from 4.3% in May.

The dollar market gave a mixed reaction against the yen, falling at first, but later gained ground and was testing the 114 handle. Markets might have gotten worried by the slower wage growth, which isn't generating substantial wage pressure and this could translate to lower inflation growth. However, a pickup in job additions seems to have instilled confidence into investors that the Fed will continue with its plan of another rate hike this year and for balance sheet reduction.

Sterling was one of the worst performing currencies against the greenback as it tumbled on a disappointing manufacturing production figure for May. UK manufacturing production fell 0.2% in May, month-on-month, coming in below the expected 0.5% and the prior month's 0.2% gain. Similarly, at a 0.1% decline, industrial output also disappointed, coming below the forecasted 0.4% gain. Pound/dollar fell a quarter of a percent following the release, last trading at $1.2875 as European markets were coming to a close. The figures were the latest in a string of weak numbers this week including a number of disappointing PMI numbers, pointing to a cooling economy and adding downward pressure on the pound.

The loonie leaped against the dollar on the figures pointing to a strong labor market in Canada. The upbeat data also adds to the speculation that the Bank of Canada could start tightening monetary policy as soon as next week during its planned policy meeting. At 45,300 there were far more job additions than expected (10K) in June, causing unemployment to dip. The unemployment rate was 6.5% in June, below the expected and the prior month's 6.6%. Dollar/loonie fell 0.66%, below the 1.29 level.

Looking at commodities, a stronger US currency deterred demand for gold that has fallen to a two-month low, reaching an intra-day low of $1,213.15 an ounce.

Pressure on oil prices unfolded for the third consecutive day, with WTI trading at $44.23 a barrel and Brent at $46.76. Investors remain doubtful that OPEC-led production cuts will clear a global supply glut.

• European equities traded modestly lower for most of the day, but the losses narrowed after the US payrolls. US equities are regaining ground after yesterday's setback. The Dow and the S&P show gains of about 0.3%. The Nasdaq outperforms (+ 0.7%)
• May UK data disappointed across the board today with industrial production (-0.1% M/M and -0.2Y/Y) and manufacturing production (-0.2% M/M and 0.4% Y/Y) both lower than the April numbers and the consensus. The UK trade deficit was also wider than expected.
• The US June payrolls report was strong with non-farm payrolls increasing strongly by 222K instead of the expected 178K rise. The May figures was revised upward from 138K to 152K. Average hourly earnings on the other hand disappointed with a rise of 0.2% M/M and 2.5% Y/Y (consensus 0.3% and 2.6% Y/Y).
• German industrial production rose more than anticipated, underpinning a strong and broad-based upswing in Europe's largest economy. Output, adjusted for seasonal swings and inflation, jumped 1.2% M/M in May (5.0% Y/Y) after rising a revised 0.7% M/M in April (2.8% Y/Y). Consensus forecasts were lower at 0.2% M/M and 4.0% Y/Y.
• Chinese President Xi Jinping took a swipe at the US for retreating from globalization at the G20, exposing the tensions before a meeting of world leaders divided over everything from trade and climate change to handling North Korea's provocations.
• ECB policy makers might be open to terminating the institution's purchases of asset-backed securities when they set the course for stimulus in 2018, according to three euro-area officials familiar with the matter. They added that the Governing Council members generally agree that the program missed the aim of reviving the ABS market.

Rates

Payrolls indecisive for core bonds

Market were eagerly awaiting the June US payrolls, but the report was mixed and didn't decisively affect the core bond markets. The payrolls and the average workweek were strong and higher than expected, suggesting buoyant activity, but the wage component (Average Hourly Earnings) disappointed once more and suggests there is no noticeable upward wage trend despite a tightening labour market. This means that core inflation will remain subdued for longer and that will lead to pressure on the Fed to tighten policy even slower. In this context, the T-Note future couldn't really choose a direction. After some minor volatility the T-Note settled near 125, the opening level. The picture is similar for the Bund which held its sideway range and trades modestly above opening levels too. The US equity future and EUR/USD didn't go far either.

At the time of writing, German yields decreased about 2 bps in the 2-to-5-year sector and were flat to up 1.1 bps in the 10-to-30-yr sector. The break of the key 0.50% yield resistance yesterday was confirmed. The US yield curve bear steepened slightly with yields up between flat (2-yr) and 2.3 bps (30-yr).

The labour market report showed the headcount was very strong with net job growth of 222K and an upward revision of the previous two reports by 47K. The lengthening of the average workweek to 34.5h (from 34.4) is also a positive sign on the health of the economy. Unemployment rose slightly to 3.4% from 3.3% due to a strong entrance of new jobseekers (361K) that surpassed the 245K new (household) jobs (the participation rate increased 0.1%-point to 62.8%). This is in fact also a positive factor. The only really negative element was the small 0.2% M/M (and 2.5% Y/Y) gain in average hourly earnings, which fell short of the 0.3% M/M and 2.6% Y/Y consensus expectation, while the May figure was revised lower to 0.1% M/M from 0.2% M/M previously.

Currencies

Dollar gains modestly on solid US payrolls

This morning, interest markets and the dollar shifted temporary in wait-and-see modus after yesterday's moves. The US payrolls were expected to decide on the next directional move. However, this wasn't the case. The global payrolls report was strong, but wages disappointed again. The dollar initially didn't know which way to go, but finally gained ground slightly. EUR/USD trades again near the 1.14 pivot. USD/JPY is nearing the 114 big figure.

Overnight, Asian equities joined the correction from WS yesterday, but the losses remained modest. The yen weakened further even as equities declined. Interest rate differentials widened further against the yen as core currencies (EMU/USD) rose. At the same time, the BOJ bought JGB's to prevent Japanese LT yields from following the rise in the US and Europe. USD/JPY set a new correction top and settled in the 113.55/85 area. EUR/JPY touched the 130 barrier early in Europe. EUR/USD also remained well bid (1.1420 area).

This morning, German May production data were very strong. They were however not able to extend yesterday's rise in European yields or in EUR/USD. Investors were reluctant to add positions ahead of the key US payrolls report. (European) yields settled near the ST top. EUR/USD held an extremely tight sideways range in the low 1.14 area.

The US June payrolls grew a strong and higher than expected 222K and the previous two months were revised higher by a total of 47K. The unemployment rate rose from 4.3% to 4.4%, but this was due to a rise in the labour force (higher participation rate). However, wage growth disappointed again at 0.2% M/M and 2.5% Y/Y (2.6% was expected). Despite the slight miss in wage growth, the report should be considered as strong, confirming the recovery in the US labour market. Even so, the reaction on the interest rate markets and of the dollar was hesitant, with no clear directional trend. After some nervous swings, the dollar finally gained ground slightly. EUR/USD came close to the 1.1445 reaction top, but a break didn't occur. The pair currently trades in the 1.1400 area. USD/JPY is setting a minor new top near the 114 barrier.

Sterling ceding ground on poor UK data

Earlier this week, sterling didn't react much to (slightly) weaker than expected data. Trade was mostly driven by technical considerations and by the price moves in the dollar or the euro. Today, there was a series of (not so important) UK eco data with the May production data, construction output, trade balance and Halifax House prices. All were weaker than expected but especially the miss in the production data was quite substantial. The data are raising new questions whether a BoE rate hike is appropriate in the near future. Sterling came under pressure after the data releases. EUR/GBP rebounded to the mid 0.8850 area. Cable dropped to the 1.29 area. The US payrolls had only a marginal impact on sterling trading. EUR/GBP now trades in the 0.8845 area while cable lost a few more tics on the USD rebound (1.2880 area).

June job gains of 222,000 and a rise in wages indicate continued economic growth ahead and a basis for the Fed to continue its current policy path. Beyond the cycle, structural unemployment issues remain.

Jobs Up 222,000 in June: Consistent with Economic Growth

Nonfarm payrolls rose a strong 222,000 in June, with the three month average at 194,000 jobs. Monthly average job gains this year continue the moderating trend started in 2014 and are consistent with a tighter labor market and rising wages/salaries.

Hiring in the services sector remained solid, with gains in business services, education & health, finance and leisure & hospitality (top graph). The local government sector showed a strong gain in June - summer schools?

In the goods sector, manufacturing employment posted a small gain, while hiring in construction was up a solid 16,000 jobs, likely reflecting some seasonal improvement. Our outlook remains for a rebound in real GDP growth in Q2 and gains of roughly 2.5 percent to 3.0 percent for the second half of this year.

Wages: Not an Isolated Number but Part of the Economic System

Job gains, on average, continue to outpace the growth in the labor force, thereby putting downward pressure on the unemployment rate and modest upward pressure on wages.

Average hourly earnings rose 0.2 percent in June, putting the year-ago pace of wage growth at 2.5 percent. Despite continued steady job growth in 2017, earnings have yet to break out of this mid-two percent pace. The softer inflation readings and weak productivity numbers have limited the gains in nominal wage growth. On balance, average hourly and weekly earnings continue to improve and, along with more jobs, support the case for household income gains.

Over the longer run, wages reflect the economic fundamentals of the labor market, and those fundamentals include productivity and inflation (middle chart). During the current cycle, analysts have repeatedly commented on low productivity, while inflation has been persistently below the FOMC's target of two percent. With both productivity growth and inflation continuing to prove sluggish, it is not altogether surprising that wage growth has disappointed given the performance of the fundamentals.

Structural Problems Persist: Limits Growth

Long-term unemployment (bottom graph) remains higher than levels of the past 30 plus years, signaling a structural shift in the labor market. Recent articles on the opioid epidemic and the shift in behavior of young men towards playing videos games at home rather than work suggest a more structural problem of worker displacement than can be dealt with by monetary policy alone. The net result is a continued lower than expected labor force participation rate, slower than expected economic growth and a gradual rise in wages as employers chase increasingly rare skilled workers.

EUR/GBP - 0.8844

 
Recent wave: Major double three (A)-(B)-(C)-(X)-(A)-(B)-(C) is unfolding and 2nd (A) has possibly ended at 0.6936.

Trend: Near term up

Original strategy  :

Sold at 0.8845, Target: 0.8745, Stop: 0.8885

Position : - Short at 0.8845

Target :  - 0.8745

Stop : - 0.8885

New strategy  :

Hold short entered at 0.8845, Target: 0.8745, Stop: 0.8885

Position : - Short at 0.8845

Target :  - 0.8745

Stop : - 0.8885

Remark: Due to holidays, next Trade Ideas update will be made on 19 July 2017.
 

Although the single currency has rebounded after finding support at 0.8756 and initial upside risk remains, as long as indicated resistance at 0.8882 (last week’s high) holds, further consolidation would be seen and prospect of another retreat remains, below said support at 0.8756 would add credence to our view that a temporary top is possibly formed at 0.8882, bring retracement of recent upmove to 0.8730-35, however, still reckon downside would be limited to 0.8719 support.

In view of this, we are holding on to our short position entered at 0.8845. Above 0.8882 would revive bullishness and extend recent upmove from 0.8304 low to 0.8900-10, having said that, as broad outlook remains consolidative, reckon current c leg of larger degree wave b should be limited to 0.8950 and price should falter well below 0.9000 psychological level.

Our preferred count is that, after forming a major top at 0.9805 (wave V), (A)-(B)-(C) correction is unfolding with (A) leg ended at 0.8400 (A: 0.8637, B: 0.9491 and 5-waver C ended at 0.8400. Wave (B) has ended at 0.9413 and impulsive wave (C) has either ended at 0.8067 or may extend one more fall to 0.8000 before prospect of another rally. Current breach of indicated resistance at 0.9043 confirms our view that the (C) leg has ended and bring stronger rebound towards 0.9150/54, then towards 0.9240/50.

Highlights:

• Employment jumped 222k in June following upwardly revised increases in both May and April.
• Private employment rose 187k following a 159k increase in May. Public jobs jumped 35k led by higher employment at local governments — including a sizeable 14k jump in the education sector.
• The unemployment rate ticked up to 4.4% from the 4.3% cycle-low in May as labour force participation edged higher.
• Average hourly earnings rose 0.2% on a month-over-month basis and 2.5% from a year ago.

Our Take:

The 222k increase in employment in June was stronger than the ~180k expected ahead of the report, even more so including 47k worth of upward revisions to the prior two months. The unemployment rate ticked higher but only because of a 361k jump in the labour force that partially retraced a large decline in May. The 4.4% unemployment rate is still below the 4.6% the Federal Reserve views as consistent with full employment in the long-run. Unemployment is down half a percent from a year ago and double that when including sources of 'hidden unemployment' like discouraged workers. Wage growth has moderated somewhat year-to-date but ticked higher in June with an increasingly tight labour market arguing more gains are on the way. On balance, the labour force data continues to suggest that the economy is having little difficulty absorbing Federal Reserve rate hikes to-date and should provide additional confidence that more are warranted.

Highlights:

• Employment rose by a much-stronger-than-expected 45k in June following May's 55k increase. Market expectations were for a 10k gain.
• Much of the increase was in part-time employment though the average increase over the last two months is still skewed toward full-time work.
• Both goods producing and services industries posted solid gains in June. The goods sector has been punching above its weight in 2017, accounting for 30% of year-to-date job growth.
• Job growth was concentrated in Quebec and BC, and to a lesser extent Alberta. Relative to a year ago, gains are more widespread with employment up in 8 of 10 provinces.
• The unemployment rate fell back to a cycle low of 6.5% despite an increase in labour force participation.
• Wage growth remained a weak point with average hourly earnings for permanent employees up just 1%.

Our Take:

Canada's impressive pace of job growth continued in June with 100k jobs having been added in the last two months alone. The economy appears to be making full use of its labour resources with the unemployment rate at a cycle low and the participation rate for 15-64 year-olds at a record high. That still isn't translating into wage pressure according to this report, though other measures are showing a healthier pace of pay growth. And the Bank of Canada might not be overly concerned about today's wage number. Their recent comments on inflation lagging the cycle indicate a willingness to tighten policy based on limited slack that should eventually put more upward pressure on prices. Their latest Business Outlook Survey should also give the bank confidence that tighter labour market conditions will eventually stoke wage growth. Plans to increase employment are more widespread than at any time in the survey's history and firms are reporting that filling jobs has become more difficult. Judging by today's report and last week's survey, we think the labour market is giving a green light for the Bank of Canada to raise rates next Wednesday.

USDCAD is at new low after CAD data came out 45.3K vs 11.4K. We adjusted the wave count a little, but still see pair in fifth wave which means it can be final leg within higher degree impulse. There is a chance for a bounce early next week, up from 1.2820/50 in three waves.

USDCAD, 1H

USD/CAD - 1.2899

 
Recent wave: Only wave v of c has ended at 0.9407 and wave C of major A-B-C correction is underway with wave iii ended at 1.4690, wave v of C may bring one more marginal rise probably in 2018

Trend:  Near term down

 
Original strategy       :

Sell at 1.3115, Target: 1.2915, Stop: 1.3175

Position: -

Target:  -

Stop: -

 
New strategy             :

Sell at 1.3010, Target: 1.2850, Stop: 1.3070

Position: -

Target:  -

Stop:-

As the greenback has fallen again after brief recovery, suggesting recent selloff from 1.3794 top (wave c of larger degree wave b top) is still in progress and bearishness remains for further decline to 1.2870, then 1.2850, however, loss of downward momentum should prevent sharp fall below 1.2800, risk from there has increased for a rebound to take place later. 

In view of this, would not chase this fall here and would be prudent to sell the pair again on recovery as 1.3010-15 should limit upside. Above 1.3070-75 would defer and suggest low is formed, bring a stronger rebound to 1.3115-20 and possibly towards previous support at 1.3165 (now resistance) but only break there would signal a temporary low is formed instead, then test of another previous support at 1.3212.

To recap, wave B from 1.3066 is unfolding as an a-b-c and is sub-divided as a: 1.2192, b: 1.2716 and wave c is a 5-waver with i: 1.1983, ii: 1.2506, extended wave iii with minor iii at 1.0206, wave iv ended at 1.0781 and wave v as well as wave iii has ended at 0.9931, hence the subsequent choppy trading is the wave iv which is unfolding as (a)-(b)-(c) with (a) leg of iv ended at 1.0854, followed by (b) leg at 1.0108 and (c) leg as well as the wave iv ended at 1.0674. The wave v is sub-divided by minor wave (i): 0.9980, (ii): 1.0374, (iii): 0.9446, (iv): 0.9913 and (v) as well as v has possibly ended at 0.9407, therefore, consolidation with upside bias is seen for major correction, indicated target at 1.3700 and 1.4000 had been met and further gain to 1.4700 would be seen later.

USD/CHF - 0.9637

Original strategy :

Buy at 0.9555, Target: 0.9655, Stop: 0.9520

Position : -

Target :  -

Stop : -

New strategy  :

Buy at 0.9555, Target: 0.9655, Stop: 0.9520

Position : -

Target :  -

Stop : -

Although the greenback retreated after rising to 0.9688 and near term downside risk remains for initial weakness to 0.9580, reckon last week’s low at 0.9552 would limit downside and bring another rebound later, above 0.9660 would signal the retreat from 0.9688 has ended and bring test of this level, break there would signal low has been formed at 0.9552, bring retracement of early decline to 0.9700 and later towards resistance area at 0.9738-43.

In view of this, we are inclined to buy dollar on further fall. Below said support at 0.9552 would signal recent decline has resumed instead, then weakness to 0.9520-25 would follow but reckon 0.9500 would hold on first testing. 

GBP/USD - 1.2884

Most recent candlesticks pattern   : N/A

Trend                                 : Near term up

Tenkan-Sen level                 : 1.2922

Kijun-Sen level                    : 1.2924

Ichimoku cloud top              : 1.2927

Ichimoku cloud bottom        : 1.2926

New strategy  :

Stand aside

Position : -

Target :  -

Stop : -

The British pound has slipped again after meeting renewed selling interest at 1.2984 and broke below previous support at 1.2893, suggesting top has been formed at 1.3030, hence consolidation with downside bias remains for retracement of recent upmove and weakness to 1.2850, then 1.2830-35 (50% Fibonacci retracement of 1.2640-1.3030) but reckon 1.2789-94 (61.8% Fibonacci retracement and previous support) would hold from here.

In view of this, would not chase this fall here and would be prudent to stand aside for now. Above 1.2920-25 would brig recovery to 1.2950 but only break of 1.2984 would signal the pullback from 1.3030 has ended, bring subsequent retest of this level possibly next week.