Weekly market update 7 January – Dollar held steady despite disappointing NFP results, commodity currencies weakened against the greenback given hawkish stance from U.S. Federal Reserve

Weekly market update 7th January – Dollar held steady despite disappointing NFP results, commodity currencies weakened against the greenback given hawkish stance from U.S. Federal Reserve

1. The Dollar dropped below 96 but held steady throughout the week even with the disappointing nonfarm payroll results. Although nonfarm payrolls increased only 199,000 in December, well below market expectations of 400,000, the unemployment rate decreased much more than expected to 3.9% and wage growth was encouraging as well, with hourly wages gaining 4.7% from a year ago. These results from the U.S. labor market could continue to support the Fed’s decision to speed up the timeline for interest rate hikes. That being said, the U.S. stock market was still trading with mixed sentiment on Friday. The Dow Jones Industrial Average was little changed, while the S&P500 and NASDAQ Composite slipped by 0.4% and 1% respectively. Moving forward, investors will be looking out for CPI and retail sales data for a better gauge on inflation and the general performance of the U.S. economy as a whole. Fed Chair Jerome Powell is also scheduled to testify on Tuesday.

2. The Euro held near $1.13 in early January, staying close to a 17-month low of $1.12 hit last November. This is mostly due to the European Central Bank being slow to tighten its monetary policy as compared to other major central banks and the U.S. Federal Reserve. Moreover, Eurozone consumer confidence was confirmed to be at -8.3 in December 2021, which is its lowest level since March of the same year. The ECB is thus likely to continue holding interest rates at record-low levels as announced to support the economic growth in the bloc amidst poor sentiment due to rising COVID-19 cases and surging prices. ECB President Christine Lagarde is speaking late next week, and investors will be looking out for any shifts in stance on its monetary policy. On the other hand, the Pound outperformed its peers over the week, holding above $1.35 in early January, amidst expectations that the Bank of England may be raising rates as early as February 2022 to stifle inflationary pressures. However, slowing economic recovery, record-high number of COVID-19 cases and post-Brexit tensions over the Northern Ireland protocol could dampen the positive sentiment in the U.K. going forward.

3. Commodity currencies continued to underperform against the greenback throughout the week, as investors digested the hawkish stance that the U.S. Federal Reserve took in their latest policy meeting minutes. The Aussie held below $0.718, ending the week almost 1% lower. The Reserve Bank of Australia continues to hold its stance on not hiking domestic rates until 2023, but investors will be looking out for the meeting on February 1st, where the RBA could decide to end its bond-buying programme early. The Kiwi performed similarly, holding below $0.677, about 1% lower over the week. Investors widely expect the Reserve Bank of New Zealand to hike rates yet again to 1.0% at its February meeting amid persistent inflation and low unemployment. The Canadian dollar held below $1.27 over the week as well. In other news, WTI crude futures are headed for its third weekly advance, trading at around $80 per barrel on Friday, as the market tightened in response to a civil unrest in Kazakhstan and supply outages in Libya. Gold rebounded to above $1,800 per ounce on Friday, but is still on track for a 2% weekly drop against market consensus of earlier and faster interest rate hikes. Although gold is traditionally seen as an inflationary hedge, higher interest rates would increase the opportunity costs of holding a non-yielding asset like bullion, thus possibly causing gold to lose its lustre going forward.