Weekly Market Update 5 June – The Dollar Index Remains Flat at 104 Amidst Divergent US Labor Market Data
Weekly Market Update 5 June – The Dollar Index Remains Flat at 104 Amidst Divergent US Labor Market Data
1. The dollar index remains flat at 104 upon conflicting economic data on US labour market. Consumer confidence reported a decline to 102.3 in May, for the first time in six months, as consumer cite growing uncertainty about the economy. JOLTS jobs opening surprised markets, coming in at 10.1M vacancies after 2 straight months of decline, supporting narrative for rate hikes. However, DXY gains were pared quickly after FOMC members supported for a “hawkish pause” in June’s meeting on Wednesday. On Thursday, ADP employment claims revealed upside of 278K jobs created in the private sector while unemployment claims came in at 232K, below market expectations. On Friday, employment change reported growth of 339K in May, up from 294K in April. However, the unemployment rate rose to 3.7%, while wage growth eased. Overall, the contradictory nature of labour market data may compel Fed Chair Powell to adopt a “hawkish pause” in the June meeting to assess the effects of past rate hikes. With expectations reversed, markets only see a 25% chance that the Fed would deliver a 25bps rate hike this month. Markets can look forward to ISM Services PMI and unemployment claim data later this week to gain further insight on the Fed’s future rate decisions.
2. The euro fell slightly against the dollar, to $1.07, as inflation cools within the eurozone. Like other major eurozone economies, German prelim CPI m/m reported cooling inflation results, coming in below estimates at minus 0.1%. Furthermore, on Thursday, CPI flash estimate y/y came in below market forecasts of 6.3%, at 6.1% in price growth. Despite the data hinting waning price growth, ECB President Christine Lagarde stated that there is “no clear evidence” that inflation has peaked and remains committed to further rate hikes. However, markets remain optimistic on pause in rate hikes, resulting in weakness in euro. This week, markets can expect PMI data across euro zone regions and also ECB President Lagarde speech to assess ECB’s policy stance.
3. The pound sterling rose against the dollar, climbing to $1.24, upon hawkish speech from MPC member, Catherine Mann. On Wednesday, Mann expressed concern about sustained inflation in comparison to other G7 countries, pointing to structural management amongst companies, private and public, in the UK as the fundamental cause. As a result, Mann believes that rate cuts are unlikely to occur anytime soon until substantial progress in decreasing core inflation is made, supporting strength for the pound sterling. This week, markets can look forward to final services PMI data to assess inflationary pressures within the UK.
4. Results were mixed for the commodity currencies last week, as the aussie and loonie strengthened while the kiwi remained flat against the dollar. The aussie dollar rallied to end the week above $0.66, after CPI y/y data reaccelerated to 6.8%, higher than the forecasted 6.5%. Despite disappointing PMI data from China, Australia’s largest trading partner, RBA Governor Lowe’s hawkish remarks at Parliament last week led markets to rally before this Tuesday’s rate hike decision. Lowe has been unwilling to “declare victory” on the inflation fight, preferring to remain “data-dependent”. Traders are split between a hike and a pause, while economists mostly expect a pause. Over in Canada, USD/CAD strengthened to $1.34, as the Canadian economy averted a contraction of -0.1% by stalling in May. The loonie was also supported by dollar weakness, brought about by poorer-than-expected manufacturing prices in the US. Investors can look to Tuesday’s Canadian PMI data for further signs on the economy’s strength, before the BoC gives its rate decision on Wednesday. The kiwi dollar ranged to end the week flat, but not before touching a six-month low of $0.60. Latest data showed that imports increased by 6.7% in Q1 2023, the largest amount in two years, overshadowing the modest rise in exports. However, the tourism sector has been relatively robust, which could offset the effect of rising imports. The RBNZ’s definitive pause on interest rates could see further weakness for the kiwi.
5. Brent crude pared losses to close the week almost flat, below $77 per barrel, as bearish traders heeded the Saudi energy minister’s call to “watch out” before OPEC+’s meeting on 4 June. Markets did not expect any further cuts from the coalition, after the previous meeting in early April yielded a total cut of 1.6 million barrels per day. Gold ended the week unchanged at $1946 per ounce, paring gains after robust US non-farm employment data increased the odds of another Fed rate hike within the next two meetings. Still, gold is likely to remain supported in the near-term by influxes into gold ETFs for the past three months.
