>> USD: Payrolls unable to give USD support
Last week’s jobs report was surprising simply for the fact that it contained few surprises. 223,000 jobs were added in April, which was roughly what the market was expecting. Although the unemployment rate fell to its lowest level since May 2008, wage increases have remained poor. A measly 0.1% rise in wages following a fall in unemployment from 6.6% to 5.4% in the past year. That lackluster result means that further jobs will have to be created for wages to meaningfully run higher.
Additionally, USD has remained on the back foot as markets look for a re-emergence in inflation (or reflation) due to increases in oil and gold prices. Yields on global government bonds have started May badly but the rises in borrowing costs are tempting investors into other currencies in a world of ultra-low interest rates.
This week we look for data to strengthen, particularly in tomorrow’s retail sales announcement, so as to banish concerns over Q1’s poor performance.
>> EUR: Rising yields, rising euros
A move of 0.6% in a week does not instinctively seem that much. A move that size in the yield of German bonds, however, is almost unheard of and has triggered fears of a large sell-off in other Eurozone bonds. As the yields get higher, the attraction of holding the euro as an asset increases as well.
Of course, this is only part of the story and a rebound in economic news has also helped the single currency off the ledge. Growth seems to be returning well in Europe with the latest run of GDP data set to show the Eurozone growing at 0.4%, faster than the US’s 0.05%.
Weakness around the Greek situation will remain until a deal with creditors is reached. February’s extension means both parties have until the end of June to agree. Should they fail, the market fears of a Greek exit may be realised but, in the near-term, recent headlines suggest Greece has a fortnight to avoid a default.
>> UK: Majority government helps sterling
David Cameron is back in as Prime Minister and a majority government quickly put to bed fears that a long coalition building exercise would hurt the pound. For now, the British can forget about politics it seems. Wednesday’s Quarterly Inflation Report is one of the most important measures for sterling so far this year. The previous iteration, released back in February, was largely positive. Carney’s statement was bullish on growth, positive on wages and, most importantly, pointing to a recovery in inflation within their forecast period of the next two years.
There is wide belief that the recent weakness in growth and inflation – Q1’s very weak GDP number in particular – will cause the Bank of England to revise these growth and inflation estimates lower.
The Bank of England is still a ways off from getting into a stance that means an imminent increase in interest rates. I would expect Governor Carney and other members of the Monetary Policy Committee to emphasise that the outlook remains ‘balanced’ in the UK.
>> CAD: Crude gains
Last week’s Canadian jobs report was a mixed bag. While unemployment rose by nearly 20,000 people, the rate of unemployment managed to remain at 6.8% – as it has been for the past 3 months. Reports suggest that the rally in oil prices may eventually lead to jobs in the energy sector returning but, for now, those are yet to be seen. Summer driving season is only round the corner and any increase in oil prices is going to be a tremendous salve for the loonie.
Looking forward to this week, it’s largely going to be the USD that is the major driver of CAD. The data calendar is quiet in the Great White North and options for CAD strength is likely to come from USD weakness and oil gains.
>> AUD: Rate cut not quite helping
Interest rates were cut to 2.00% in Australia last week, a new record low, with Governor Stevens reiterating that, “the inflation outlook provided the opportunity for monetary policy to be eased further, so as to reinforce recent encouraging trends in household demand.”
The cut hasn’t had the desired effect on the currency however with AUD moving higher after the announcement; markets clearly believe that this is the last bullet from the Reserve Bank of Australia’s gun.
Poor data from China in the past week alongside its own rate cut means that more will need to be seen from policymakers Down Under for the desired weakness in the currency to be seen.