• December jobs report jolts the dollar
  • ECB may go timid with its bond buying
  • No wage growth in the US, may hurt the dollar
  • CAD may weaken more, tracking oil

There is no certainty in the foreign exchange market. Friday’s US employment report jolted the US dollar up immediately after the release of the December headline figures which showed another strong month of job creation and a falling unemployment rate. The dollar quickly gave up its gains as the market learned that average hourly earnings unexpectedly fell last month and about 270,000 people left the labor force, suggesting that the overall employment condition is not as rosy as the headline figures portended.

252,000 new jobs were created in December and the unemployment rate fell from 5.8 percent to 5.6 percent. Economists expected job gains of 240,000 and the unemployment rate to fall to 5.7 percent.

A standard economic theory posits that when an unemployment rate falls close to a full employment rate, which the Fed estimates to be about 5.5 percent, wages will begin to rise since employers to have to pay more to recruit and retain their workers. Oddly, the average earnings have remained anemic in the current recovery, posting about 1.7 percent year over year growth, as the unemployment rate fell rapidly from its recession high of 10 percent in 2010.

This lack of wage growth has rekindled market chatter over the weekend among analysts that the Fed may hold off on raising the short term interest rates this year. Further fueling this speculation, two Fed governors spoke on Friday afternoon and argued for more patience in raising rates. Lower rates tend to make the currency less appealing to investors. As a consequence, the dollar gave back its Friday morning gains and trending lower this morning.

There is no significant data or event scheduled for today. That said, the market will be paying close attention to Wednesday’s December Retail Sales report. Advance holiday sales data from private forecasting firms suggests that consumer spending remained strong in December, supported by falling oil prices. However, if the retail data shows any sign of slowdown in response to stagnant earnings then the dollar could give up more gains this week.

EUR-USD has climbed over the 1.18 support level overnight after a leaked document from the European Central Bank (ECB) suggested that the bank is considering a smaller bond buying program than what the market is expecting. The euro has been under pressure recently in anticipation of new money flooding the market via ECB bond buying efforts. However, if the ECB takes a cautious approach then the euro may gain some temporary support.

GBP-USD is trading higher toward a critical resistance level of 1.52 this morning even though the November industrial production data missed expectations by dipping 0.1 percent versus +0.2 percent expected. The unexpected decline in production was mostly caused by slowdown in North Sea oil production. However, the pound is firmer today against the dollar mostly due to the greenback’s weakness.

USD-CAD is approaching 1.19 and many analysts expect the USD-CAD to breach 1.20 later in the month if oil prices continue to stay below $50 per barrel. As mentioned in the previous updates, the CAD and oil price movements have been correlating closely since July. There is no major data or event scheduled for the CAD calendar this week.

I will be traveling to Wisconsin this week to meet with some of our clients to talk about the currency outlook for this year and also Green Bay Packers’ sensational win over the Cowboys yesterday.

Have a great day!