>> Dollar waits on Friday’s employment report

Last week, a string of bad economic news triggered a wave of dollar selling.  On Tuesday, the April consumer confidence index plunged by 6.4 pts to 95.2.  The next day, the early estimate for the 1st quarter growth rate came in near zero.

The dollar selling came to halt only after Thursday’s initial weekly jobless claims fell to a 15 year low.  This suggests that the labor market could still be heating up.  On Friday, the dollar finally managed a small rally after the April Institute of Supply Management manufacturing index showed that manufacturing was holding up despite the strong dollar. The new orders also picked up nicely.

So where to go from here? All eyes will be on this Friday’s Employment Report.  If we see strong gains in hiring and hourly wage, then I expect the dollar to reclaim last week’s short squeeze losses.

>> Euro is at risk this week

The euro rose to a near 8-week high last week as German bond yields abruptly climbed higher.  Most investors expected deflation-like conditions to persist well into next year and bought up whatever German bonds they could find in the hope of more price gains.  This drove the bond yields to zero and, in some cases, to negative terrain.

Given this context, Thursday’s April Eurozone consumer inflation report was a big surprise.  The European Central Bank’s monthly bond purchasing program (which only began in March) seem to have halted prices from falling.  The April inflation rate remained unchanged and posted 0%, though the market was expecting another month on month decline.

That said, I suspect that the euro is at risk this week. Early reports suggest that Greek bailout talks stalled this weekend.  Eurogroup’s next meeting is on May 11th, and I’m afraid Greece is playing another game of chicken. Stay tuned.

 

>> All eyes will be on the election

After rallying for three weeks, the pound fell sharply on Friday after the April manufacturing activity index missed badly.  The index fell to 51.9 from 54.3.  A drop in new orders received from aboard overshadowed decent domestic demand. As mentioned in earlier updates, the pound’s strength against the euro is increasingly curtailing competitiveness in the export sector.

The highly anticipated general election is finally here.  I expect the pound to fall more ahead of the election on Thursday. I’ve seen 100 to 200 point drops before tight elections.  The latest poll shows that Labour and Conservatives are in a deadlock.

 

>> The loonie is ready to make another run

The loonie’s two-week rally came to stop on Friday.  The currency has fared well as oil prices surged 20% in April.  But, I do expect the oil rally to consolidate this week before making another run as summer driving demand picks up.

Meanwhile, if this Friday’s employment number shows solid gains, then the loonie could easily make another attempt at breaking a 4-month high this week.  The market expects employment to increase by 15,000, and the unemployment rate to remain at 6.8%.

Accordingly, the number of outstanding futures contract for selling Canadian dollar fell last week. This suggests to me that professional speculators are already betting that Friday’s employment report will kick off another run by the loonie.

 

>> Reserve Bank expected to cut the rate

The Aussie dollar fell last week as investors began to speculate on the Reserve Bank’s interest rate decision tomorrow.  The futures market suggests 50% odds of another rate cut.  I see 80% chance for the cut because the bank needs to devalue the Aussie dollar to promote export and prevent further job and income losses.

Iron ore is Australia’s number one export commodity, and its price fell by 70% since January 2014.  With China – which is the number one buyer of iron ores for steel production – continuing to slow, I’m convinced that the Reserve Bank has no choice but to devalue the currency.

Following the Reserve Bank policy decision tomorrow, the April employment report will be released on Thursday.  I expect the unemployment rate to increase by another 0.1% to 6.2% from the previous month.