Forex Market Review (European Session) – US dollar gains despite disappointing jobs report as broader picture supports December hike
The US dollar posted gains during today’s European session, despite a disappointing October employment report, which did little in dissuading the market to expect a rate hike at the next Fed meeting.
In this week’s major economic release, the US labour market rebounded less strongly than expected from the hurricane-induced slowdown of September. The economy created a net 261,000 jobs during October, missing analyst forecasts of 310,000. There was a positive revision of the previous month’s figures to +18,000 from a contraction of 33,000. The other bit of positive news concerned the unemployment rate, which dipped further to 4.1% from the previous month’s 4.2% – the lowest rate since 2001. However, average hourly earnings disappointed by coming in flat against expectations of a 0.2% month-on-month expansion. The yearly growth rate in hourly wages thus fell sharply – down to 2.4% from the previous month’s slightly inflated 2.9%. The participation rate also disappointed as it fell to 62.7% from 63.1%. Overall the data certainly did not impress but nor did it create worries that there was a significant slowdown underway.
Other data supported the case for strong US economic growth. The huge services sector was doing very well in October according to the Institute for Supply Management (ISM), as the non-manufacturing PMI climbed to 62.2 – the highest since May. The expectation was for the index to ease back to 61 from September’s 61.3 print. September factory orders also came in positive as they gained 1.4% month-on-month versus analyst expectations of a 1.3% gain. Finally, the trade deficit for September widened slightly to 43.5 billion dollars from 42.8 billion in August, but that was the result of the growth in imports outpacing slightly the growth in exports, which can be a positive indication for both the domestic and the global economy.
Euro/dollar initially rallied just after the release of the employment numbers, touching a high of 1.1689, but subsequently weakened to 1.1606 as the session progressed and traders assessed the impact of the data together with the other news. Dollar/yen also staged a strong rally, rising to 114.35 and getting ready to test the highs of the last 7 months around 114.45-50. The dollar’s resurgence despite the weak employment data also stopped an attempt by sterling to rebound from yesterday’s big losses. Pound/dollar dropped to 1.3066 after unsuccessfully trying to take on the 1.31 level earlier in the day.
There was also some good news concerning the pound as the UK services’ PMI climbed to 55.6 in October from 53.6 the previous month. The PMI released this week for the various sectors of the UK economy are pointing to decent growth of around 0.5% during the fourth quarter according to Markit, which would calm worries about a Brexit-induced economic slowdown.
The one currency that managed to recover strongly from recent losses against the US dollar was its northern neighbor, the Canadian dollar. USD/CAD dropped by more than 100 pips following the simultaneous release of positive Canadian employment figures at the same time as the US employment report was hitting the wires. It was a volatile day for the loonie as USD/CAD fell to as low as 1.2714 from around 1.2830 before the numbers were released. The greenback subsequently recovered to 1.2767. The Canadian economy created 35.3 thousand jobs in October while economists were expecting around 15 thousand new jobs. On the other hand, the unemployment rate rose slightly to 6.3% from 6.2%, but traders seemed to place more emphasis on the number of jobs created.
Following three very busy days for the US dollar that included the Fed meeting, the announcement of the nominee for the post of new Fed chair and the all-important nonfarm payrolls, market participants will now be focusing on the tax cut package that Trump and the Republicans are working on. The other week will likely involve digestion of recent events, as the calendar for the major economies will be relatively more light.