Weekly Market Update 6 February – Dollar rallied on strong employment data to touch 103 from a nine-month low
Weekly Market Update 6 February – Dollar rallied on strong employment data to touch 103 from a nine-month low
1. The greenback rallied from a nine-month low to touch 103, on the back of stronger-than-expected employment data. Earlier in the week, the Fed raised rates by the widely-expected 25bps, while Fed chair Powell talked about the arrival of the much-awaited disinflationary process. The dollar slumped to a low of 100.80 as markets digested his comments. However, Friday saw non-farm employment rose by 517k, soundly beating market forecasts of 185k. San Francisco Fed President Daly described it as “wow numbers”, indicating surprise at the labour market’s strength. At the same time, unemployment dropped to the lowest rate in more than 50 years, reaching 3.4% as the number of jobless people fell by 28k while the number of employed rose by 894k. The red-hot labour market strengthens the case for further rate hikes by the Fed and for longer, with markets expecting the terminal rate to now exceed 5%. These expectations have pushed the dollar higher as it seems the Fed’s hawkishness will likely continue for some time. Tuesday will see Powell speak at the Economic Club of Washington DC, while Thursday’s unemployment claims might show how tight the labour market is.
2. Euro ended the week nearly flat at 1.08 against the dollar after paring midweek gains. The ECB raised rates by another 50bps on Thursday, with a commitment to a further 50bps rise next month. While the ECB remains much more hawkish than the BoE or the Fed, ECB President Lagarde sent out slight dovish signals when she said that inflation and growth were now “more balanced” than in previous months. Adding to the downward pressure on the euro was the strengthening dollar, buoyed by rosy employment data. Still, the ECB is yet to beat inflation, with Germany’s delayed inflation numbers due this Thursday.
3. The pound pared gains to end the week at a low of 1.20 against the dollar, after the BoE hinted that it was nearing the end of its tightening cycle. Last Thursday, the BoE raised interest rates by 50bps, in line with market expectations. However, BoE’s Governor Bailey indicated that there were signs of inflation having “turned the corner”, while the BoE dropped its promise to “respond forcefully, as necessary” in response to inflation. These dovish signs caused the pound to weaken even as the interest rate rose to a high of 4.0%, last seen in 2008. This Friday will see the release of m/m GDP figures, where it will be seen if the UK avoided a recession in December.
4. The commodity currencies all fell against the backdrop of the strong dollar. The Aussie ended the week slightly above $0.69 against the dollar. The RBA is facing a tough situation as the economy is starting to cool while inflation remains stubbornly high, at 6.9% in the last quarter in 2022, higher than their forecast of 6.5%. Retail sales fell 3.9% in December compared to the previous month, as inflation begins to bite. The markets are betting that rates are raised by 25bps this Tuesday, although they have also increased their bets on the terminal rate increasing from 3.65% to 3.75%. The Kiwi dollar also ended the week at the low of $0.63, as the New Zealand economy showed signs of slowing. Unemployment rose from 3.3% to 3.4%, while the q/q employment came in below expectations, 0.2% instead of 0.3%. There are now increasing expectations that the RBNZ will downshift to a 50bps hike this month. Elsewhere, USD/CAD pared losses to trade at around 1.34 after strong US employment data. Canada’s GDP merely grew by 0.1% in December compared to November, which did not differ much from policymakers’ expectations. Unless this Friday’s employment data reflects a tight labour market, the BoC is expected to end its tightening cycle.
5. Brent crude oil slumped to $80 per barrel as traders reassessed demand from China and the impact of Western sanctions on Russian oil. Outlook on Chinese demand remains uncertain, while Russia’s oil exports remained resilient. At the same time, the US’ strong employment data gave room for the Fed to continue hiking rates, increasing the risks of an economic slowdown. Gold pared gains to end the week near $1864 per ounce, as traders expected a more hawkish stance from the Fed after Friday’s strong jobs report. Traders are now pricing in the possibility of the Fed extending its tightening cycle, causing non-yielding bullion to become less attractive.
