Week Ahead: Dollar rebounds on strong jobs report

July 10, 2017 09:00 AM

The U.S. dollar is higher against most major pairs after a jobs report that added more than 200,000 positions. The Canadian dollar was the outlier making gains against the greenback on the back of a similar strong jobs report that validates the hawkish comments from the Bank of Canada (BoC) in the last three weeks.

The Bank of Canada surprised the market on June 11 when senior policy makers at the central bank started signaling that the end of an easing monetary policy was near. The last change in interest rates were the two rate hikes in 2015, a proactive measure ahead of the eventual drop in oil prices. The BoC will publish its rate statement on Wednesday, July 12 at 10:00 am EDT with the BoC Governor Stephen Poloz giving a press conference at 11L15 am EDT.

Fed Chair Janet Yellen will be giving her semiannual monetary policy report to the U.S. House Financial Services Committee on Wednesday, July 12 at 10:00 am EDT and to the Senate Banking Committee on Thursday, July 13 at 10:00 am EDT. FOMC members will be speaking during the week reiterating the high probability of another rate hike and the imminent start of the central bank's balance sheet reduction sooner rather than later. U.S. economic indicators to note are the release of the Producer Price Index on Thursday, at 8:30 am EDT, U.S. retail sales and inflation data on Friday, July 14 at 8:30 as a potential obstacle for dollar gains as inflation has been subdued as evidenced by the wage component of the jobs report.

euro dollar weekly graph The euro/U.S. dollar (EUR/USD) currency pair lost 0.271% in the last five days. The single currency is trading at 1.1385 after the U.S. non farm payrolls (NFP) report added more jobs to the economy than what forecasts called for. The USD rose against the euro as strong employment validates the path of rate hikes that the Fed has embarked upon. The inflation component of the jobs report was softer, with a 0.2% gain in wages on a monthly basis but the central bank has agreed to move ahead without much inflationary pressure.

The G20 summit got under way in Hamburg Germany with little for markets to trade on outside of the usual pleasantries from world leaders. Political risk has been significantly reduced after the summer elections in the UK and France. It won't be until September when Germans head to the polls, but Merkel's position is far more solid at the helm of Germany.

U.S. retail sales and the CPI indicators to be released on Friday have proven to be a pain on the side of the U.S. dollar on a regular basis. Consumers remain confident when surveyed, but they are opting to save more. The U.S. economy depends on consumer spending which is now in a paradox of confident but frugal consumers. Weak inflation has been deemed a temporary condition by the U.S. Federal Reserve as it has opted to move on its path of gradual tightening despite being below the 2 percent target. Forecasts call for an improvement on retail sales and the CPI, but the PPI is expected to remain flat as producers keep prices without change putting a little pressure on higher prices for consumers.

Canadian dollar weekly graph July 3, 2017

The USD/CAD lost 0.751 in the last five trading sessions. The currency pair is trading at 1.2871 after the release of employment reports in the US and Canada. The U.S. non farm payrolls (NFP) report showed the United States added 220,000 new positions in June, but wage growth remains slow with a 0.2% monthly gain. The strong NFP will keep the Fed on target as it looks to raise rates at least once more before the end of the year and start reducing the balance sheet it accumulated during its quantitative easing program.

Canadian jobs surprised to the upside with another strong gain. Canada added 45,000 jobs in June, although less full-time positions than in May but a strong showing that dropped the unemployment rate to 6.5 percent. The loonie appreciated after the release as it adds further speculation that the Bank of Canada (BoC) will hike rates on July 12 after several comments from senior central bank members. The Canadian central bank changed its tune on June 11 and started signalling an upcoming rate hike after the two rate cuts in 2015 and the government's fiscal stimulus seemed to have done their job. The BoC was not forecasted to hike rates until 2018 as there are still major question marks with oil prices and the NAFTA negotiations in the fall, but the pace of growth in the Canadian economy is giving the central bank the confidence to make a move sooner rather than later and keep up with the Federal Reserve.

The Bank of Canada (BoC) monetary policy meeting will be the highlight of the week. Central bank rhetoric in the developed economies has now taken hawkish tone as the European Central Bank (ECB), Bank of England (BoE) and the Bank of Japan (BOJ) have seen improvement in economic growth. The BoC is ahead of the pack and slightly behind the pack as it carries no quantitative easing program to taper and its benchmark rate is 50 basis points. A-25 basis point move at the next meeting would keep it close to the 100–125 basis points of the Fed funds rate.

Oil prices tumbled 3.917% this week. The West Texas Intermediate is trading at $44.10 in a volatile week for energy, with prices oscillating between the weekly high of $47.18 and dropping as low as $43.67 as inventories in the United States pointed to a larger drawdown than expected but global supply rumoured to be on the rise despite the Organization of the Petroleum Exporting Countries (OPEC) production cut agreement put more pressure on the downside. OPEC members will meet in Russia with other producers that have agreed to cut production to normalize the market. Russia does not appear to want to increase the amount of the cuts, and other producers are asking for the exemptions given to Nigeria and Libya to be finalized.

Crude oil rigs in the United States have started to increase as shale operations take advantage of stable prices at current levels. The diplomatic disagreement between Qatar and other Arab nations leaves in question the unified front of the OPEC as Saudi Arabia's leadership in the group will be questioned. Weekly inventories regain their normal publication date with U.S. crude stocks to be reported on Wednesday, July 12 at 10:30 am EDT.

The USD/JPY gained 1.361 in the last five days. The currency pair is trading at 114.00, near the weekly highs of 114.18 after a strong NFP report in the United States and the pledge of the Bank of Japan (BOJ) to buy an unlimited number of bonds to keep domestic rates. The BOJ had started to taper its bond buying but caved against internal pressure and are once again laggards in the move to a tightening monetary policy.

The Fed has hike rates twice in 2017 and is looking to reduce the balance sheet it accumulated during the massive QE program and hike rates at least once more before the end of the year. The USD has been held back by political risk as the Trump administration has struggled to come out strong out of the gate despite enjoying a majority of republicans at the House and Senate. The U.S. central bank has been optimistic that the economy will continue to expand with the policies currently in place, so the pro-growth policies promised by Trump are not part of the forecast guiding the Fed's actions.

Dollar Japanese Yen currency pair weekly graph

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