USD: Lost some of its sparkle for now

The dollar lost some of its sparkle last week after the release of Friday’s US employment report was released. Although the December headline figures looked promising, the market quickly learned that the average hourly earnings unexpectedly fell and over 270,000 people left the labor force during the month, suggesting that the overall employment condition is not as rosy as the headline figures anticipated.

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 have to pay more to recruit and retain their workers. Oddly, the average hourly 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.

The 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. Consequently, the dollar lost some of its sparkle for now.

The market will be paying close attention to Wednesday’s release of December Retail Sales to see if the lack of wage growth may began to hold back consumer spending as well.

EUR: Waiting on ECB

The euro came under more pressure last week when the Eurozone inflation rate plunged into a negative territory in December, stoking a deflationary fear and further economic slowdown in the zone. The market is speculating that the European Central Bank (ECB) has no choice but to launch a Japan-like aggressive quantitative easing or bond buying program at its January 22nd policy meeting. They want to inject more money into the financial system to fuel more lending and spending in the economy and push inflation up to its stated goal of two percent.

ECB President Mario Darghi made it clear that the bank is looking into several options for buying sovereign bonds despite a strong opposition from the German government and its central bank. The only question that remains unanswered is the size of the bond buying program. Most analysts estimate the bank need to buy over EUR 1 trillion of bonds to sufficiently flood the market and remove a credit logjam in the financial system, which should encourage consumers to spend and businesses to invest.

Additionally, a Greek national election scheduled for January 25th has started to creep into the market chatter last week. Although the probability of Greece leaving the Eurozone is small, uncertainty is something that the market does not like. Therefore, the euro has a significant downside risk during the next two weeks.

For this week, the market will be paying close attention to the release of December Eurozone Consumer Price Index data to see if deflation is here to stay.

GBP: Dark cloud is forming

The pound fell precipitously last week as an economic slowdown in the Eurozone has turned into a strong headwind for the economy as it struggles with anemic production and waning investment which have added to rising current account deficits – net outflow of funds – that are reaching alarming levels. In the past, when the current account deficit reached such high levels, the pound inevitably fell. So, a significant fall in the pound is not a remote possibility in the coming months.

The November Industrial Production data released last week missed expectations by dipping 0.1 percent versus +0.2 percent expected. The unexpected decline in production is one of many recent data that depict an economy that is struggling to maintain its recovery.

With a general election scheduled for early May, the Bank of England (BOE) is expected to make no policy change, as did last week, out of the concern for maintaining its independence from political party wrangling. Therefore, with no expected help from the BOE, the current bearish sentiment will continue to linger over the pound leading up to the election.

For this week, the market will be paying close attention to the release of December Consumer Price Index data on Tuesday to see if deflationary effects from Europe spill over to the UK and further undermine the pound.

CAD: Tracking oil and falling lower

The loonie – a Canadian one-dollar introduced in 1987 – has been continuing to move in line with recent oil price movements. And another 8 percent drop of crude oil prices last week has pushed the Canadian currency lower particularly against the US dollar.

On a positive note, the government confirmed last week that it is on track to balance the 2015 budget, arguing that a balanced budget will help increase Canadian economic potential. Recent economic data has shown that the recovery is broadening and a slack in the economy is getting smaller. But the Bank of Canada made it clear that it will maintain its dovish money stance as long as oil prices remain at current low levels and the demand for commodity exports remain weak amid a global slowdown.

The Chicago Exchange is pricing the February delivery price of WTI oil at $47.76 this morning, suggesting that there is no sign of immediate price recovery. Correspondingly, the loonie is forecast to go lower this week.

There is no major data or event scheduled for the CAD calendar.

AUD: Consolidating for now

After making a 5-year low against the US dollar early last week, the Australian dollar bounced back somewhat in response to stabilizing commodity prices and a better than expected November trade deficit data. The trade deficit improved to -A$877 million from -A$1,323 million in October.

That said, a short-term sentiment for the Australian dollar remains bearish amid global slowdown and anemic commodity prices. The Reserve Bank of Australia is expected to lower its interest rate at their next meeting in February 3rd in a desperate attempt to reverse a record high unemployment rate and stimulate domestic spending to make up for falling exports.

Lower interest rates tends to erode the currency value. The forward market data has already priced in the expected February rate cut and forecast forward AUD-USD to go even lower in the coming weeks and months.

For this week, the market will be paying close attention to the release of December unemployment rate on Thursday. The market expects the unemployment rate to remain unchanged at 6.3 percent. However there is a significant downside risk for market disappointment and could see the Australian dollar renew its fall.