USD: A strong job report

The dollar rallied sharply and broadly on Friday after the release of a much better US January employment report.  275K new jobs were created last month in comparison to 230K expected, and the unemployment rate rose to 5.7 percent from 5.6 percent. This was driven by 700K workers, who had previously given up looking for work, re-entering the labor market, signaling that the employment condition has improved markedly. More notably, the average hourly earnings also rose 2 cents in January to $24.75, following a decrease of 5 cents in December.

Treasury bill and bond yields shot up, and stayed up on Friday afternoon, perhaps as the market came to the consensus that the Fed will be raising the interest rates starting in June.  The Fed has been waiting for a clear sign of wage pick up before implementing its rate normalization plan.  Higher interest rates will make the dollar more attractive to overseas investors.  Therefore, the dollar is forecasted to go higher in the coming weeks.

This week, retail Sales report will be released on Thursday.  If there is a sign that consumers have picked up their spending last month, following an uptick in wages and falling gas prices, then the dollar rally may accelerate this week.  Stay tuned.

EUR: Greek debt drama continues 

The euro rose earlier in the week following news that the Swiss National Bank (SNB) has been buying euros and selling francs to weaken the Swiss franc and help exporters who have been devastated by the SNB abandonment of its euro-franc currency floor.  However, the euro regained its downward trend on Thursday when Greek and German Finance Ministers clashed and “agree to disagree” on handling the current Greek debt crisis.

Meanwhile, the European Central Bank announced that it will no longer provide funds to Greek banks. As a result, Greece’s credit rating was lowered by Standard and Poor’s on Friday, suggesting that Greek finances are rapidly deteriorating as a new anti-austerity government prepares to continue its acrimonious debt negotiation with the EU and ECB this week.

Greece has borrowed more than €260 billion from the EU and ECB on a promise that it will restructure its economy and become more competitive.  However, after several years with no visible signs of a recovery, and the unemployment rate still hovering above 25 percent, the new Greek government wants to renegotiate the terms of its debt.

As the debt negotiation continues this week, the euro is forecast to go lower. The 4th quarter EU Gross Domestic Product report will be released on Friday.

GBP: Solid data so far, waiting on Bank of England

The pound was well supported last week after the release of  solid UK data including the January PMI surveys that showed all three sectors (manufacturing, construction and services) beating expectations, mostly reversing unexpected weakness in December.

The composite PMI rose to 56.9 in January, up from December’s 55.4 – which was the lowest since May 2013.  The Market indexes, including manufacturing and construction, also rose to 57.2 from December’s 19-month low at 55.8 and beat the market expectation of 56.5.

The January PMI convincingly suggest that the economy is growing at a slightly faster pace since the start of this year in comparison to the 4th quarter, which saw a rise of 0.5 percent according to the official preliminary estimate. Therefore, the pound will be looking for additional support from the Bank of England (BOE) Quarterly Inflation Report on Wednesday and BOE’s Governor Mark Carney speech on Thursday.

If BOE Governor Carney affirms a growing market view that the economy is getting stronger then the pound may gain more strength on the expectation that the central bank will raise the interest rate perhaps as early as during the first quarter of next year.

CAD: A surprisingly good jobs report

The Canadian dollar rallied against the major currencies on Friday (except against the US dollar) on a solid jobs report that showed employment rising to 35.4K in January, which is much better than 5K expected.  The January unemployment rate also fell to 6.6 percent from 6.7 percent in December.

The substantial improvement in the labor market conditions last month have reduced pressure on the Bank of Canada to cut the interest rate again in March.  This shift in the market expectation may provide a firm support for the Canadian dollar this week.

That said, the recent Canadian dollar movements have been highly correlated to that of oil price movements.  Therefore, a lingering bearish sentiment on oil will continue to put downward pressure on the Canadian dollar and may reverse its gains if oil prices fall this week.  There is no major economic report or event scheduled for release this week.

AUD: Another rate cut in waiting?

The Australian dollar managed to gain last week in the wake of the Reserve Bank of Australia (RBA) monetary statement on Tuesday which downgraded growth and inflation forecasts by a little less than most analysts had expected.  Most analysts had been expecting the central bank statement to outline rapidly deteriorating economic conditions amid slowing China and continued falling commodity prices.

The central bank may not have described the economy’s condition as dire, but it reiterated the position that the Australian dollar continues to remain overvalued.  Therefore, most analysts expect the central bank to make another rate cut by next month.  In fact, the latest Bloomberg survey found 11 of 24 economists polled expect another rate cut, while 13 expect an easing by April. This backdrop should keep the pressure on the Australian dollar this week.

This morning, RBA Governor Glenn Stevens is scheduled to give a speech on the bank’s monetary policy.  The January Employment Report will be released on Thursday.