Markets eye US, Canadian job data
The Canadian dollar is steady in Friday trade, after sustaining considerable losses a day earlier. In the North American session, USD/CAD is trading at 1.2118, up 0.11% on the day.
The US dollar was broadly higher on Thursday, as the Fed surprised the markets when it announced that it will begin to scale back its portfolio. The Fed ended its purchase of corporate bonds in 2020, and will now gradually sell these assets.
The Fed has taken pains to emphasise that this sale is not a monetary policy action, as it does not affect the purchase of government bonds. The latter is intended to improve economic conditions and keep borrowing costs at ultra-low levels. Still, this most recent move has boosted the US dollar, as it appears to signal a move towards tapering QE and potentially raising interest rates. More Fed members are coming out and publicly urging the Fed to hold a discussion about tapering, and this has investors keeping a sharp eye on inflation and employment figures, which could be instrumental in any Fed decision with regard to tapering.
The market will quickly shift focus from the Fed to the US employment report (12:e30 GMT). The consensus stands at 644 thousand, which would be a strong acceleration from the April release of 266 thousand. However, the markets are well aware that recent forecasts for NFP have been wide of the mark, including the April reading, as the consensus was 990 thousand. This week's ADP Employment Report showed a gain of 978 thousand, crushing the estimate of 645 thousand. However, the APDP reading is not a reliable indication of how official nonfarm payrolls will perform.
Canada will also release key job data (12:30 GMT), with the market expecting soft numbers. April was dismal, as the economy shed 207.1 thousand jobs. May is expected to show a small decline of 20.0 thousand. The unemployment rate is projected to edge up to 8.2%, down from 8.1%
USD/CAD is putting pressure on resistance at 1.2137. This line was tested last week. This is followed by resistance at 1.2195. With the pair moving higher, 1.2025 has some breathing room as support. Below, there is support at 1.1971 New Zealand dollar slide continuesThe New Zealand dollar has recorded losses for a third straight day. In the European session, NZD/USD is trading at 0.7212, down 0.33% on the day.
The ANZ Commodity Price Index climbed 1.3% in May, marking an eighth consecutive rise. The index rose to a record level, as commodity prices rose in all major categories. The rise in commodities this year is in sharp contrast to 2020, when the Covid pandemic caused a sharp downturn in the global economy. This was reflected in a sharp fall in commodity prices, as the Commodity Price Index recorded declines throughout most of 2020.
As Covid rates fall, major economies have been reopening, and improving economic conditions have led to speculation that central banks may respond by tightening policy. The Bank of Canada recently tapered its QE programme and the Reserve Bank of New Zealand surprised the markets last week when it signalled the potential of a rate hike in the second half of 2022. If the RBNZ continues to send a hawkish message to the markets, we can expect the New Zealand dollar to gain ground.
This week's key event is the US nonfarm payroll release for May on Friday (12:30 GMT). The market is projecting a strong release, with a consensus of 664 thousand. If the upcoming release is within expectations, it would indicate a significant acceleration from the April reading of 266 thousand. The April release was a massive miss, as the forecast stood at 966 thousand. Investors can be expected to be cautious ahead of the release. If the nonfarm payroll release is as strong as expected, we could see a breakout in the forex markets on Friday.
Investors will also be keeping an eye on wage growth, which could put a damper on the NFP party. Average Hourly Earnings is projected to slow to 0.2% in May, after a sharp gain of 0.7% previously.
There is resistance at 0.7777 and 0.7846. On the downside, we have support at 0.7658 and 0.7608 AUD dips as Australian GDP slowsThe Australian dollar has reversed directions and is in negative territory on Wednesday. In the European session, AUD/USD is trading at 0.7724, down 0.36% on the day.
Australia's economy rose 1.8% (QoQ) in the first quarter of the year, down from 3.2% in Q4. This was above the consensus of 1.5%. The level of economic activity currently is 0.8% above the fourth quarter 2019 pre-pandemic level, as the recovery continues to deepen. On an annual basis, GDP climbed 1.1%, rebounding from the -1.0% read in Q4.
The solid growth in Q1 reflects the continuing easing of health restrictions and the recovery in the employment market. Still, the positive numbers failed to impress investors, as the Australian dollar is down considerably in Thursday trade.
The market will get another snapshot of the strength of the economy on Thursday, with the release of Retail Sales (1:30 GMT). In March, Retail Sales climbed 1.1%, and an identical gain is projected for April. As well, the country's trade balance is expected to widen to AUD7.90 billion, up from AUD5.57 billion.
The RBA did not make any waves at its monthly policy meeting on Wednesday, as the bank maintained its policy settings. There is some unfinished business on the plate of RBA policymakers, as the bank will decide in July whether to implement further QE. The RBA statement did not provide any clues as to what the RBA is planning to do come July. The statement noted that “despite the strong recovery in the economy and jobs, inflation and wage pressures are subdued" and added a typical message that the bank is "committed to maintaining highly supportive monetary conditions". Any hints from the RBA about QE could have a significant effect on the movement of the Australian dollar.
On the upside, 0.7727 is under pressure. Above, there is resistance at 0.7777. There are support levels at 0.7658 and 0.7608 Canadian dollar rises ahead of GDPThe Canadian dollar continues to drift this week. In the European session, USD/CAD is trading at 1.2037, down 0.08% on the day.
Canada's economy is expected to have surged ahead in the first quarter of the year. GDP grew at an impressive rate of 9.8% (YoY) in Q4. The consensus for Q1 stands at 6.8%, which would bring growth close to pre-Covid levels. These GDP figures are impressive, but should be taken with a grain of salt, as that they are in comparison to figures from a year ago, when Covid was at its height and caused a steep economic downturn.
The economic recovery has been fuelled by a resurgence in exports and the strong housing market. Interestingly, the recovery has forged ahead largely without the support of consumer spending, a key driver of economic growth. Strict lockdowns have put a crimp in consumer spending, but pent-up demand is expected to translate into a surge in consumer spending later n the year.
Canada's Covid vaccine rollout has been sluggish, but infection rates are slowly receding. This has meant that health restrictions have been eased as the economy reopens. In April, the Bank of Canada was the first major central bank to announce a tightening in policy. With the US and UK economies heating up, the Fed and BoE may well follow the BoC example and taper their QE programmes. The BoC has signalled that its key interest rate could rise above the current 0.25% in late 2022. If the BoC continues to drum a hawkish message, the Canadian dollar could break below the 1.20 level, which has held since 2015.
USD/CAD faces resistance at 1.2137 and 1.2195. The pair continues to test support at 1.2025. Below, there is support at 1.1971. Euro steady ahead of US inflationThe euro is almost unchanged on Friday. In the North American session, EUR/USD is trading at 1.2190, down 0.02% on the day.
In Germany, Covid-19 cases have been declining in recent weeks, as the vaccine rollout has gathered steam. Some states have eased lockdown conditions and the reopening of the largest economy in the eurozone should continue in the coming months.
Despite this optimistic outlook, the German consumer remains in a dour mood. The GfK Consumer Climate index has been mired in negative territory for over a year, as consumers remain pessimistic about economic conditions. In May, the index came in at -7.0, weaker than the forecast of -5.3 points. The ongoing weakness in consumer confidence is in sharp contrast to business confidence levels, as companies remain optimistic about the German economy. German Ifo Business Climate rose to 99.2 in May, its highest level since April 2019.
In the eurozone, the data calendar is light. France's numbers were a disappointment. Consumer Spending in April plunged 8.3%, worse than the consensus of -4.1%, marking a second straight decline. As well, GDP for the first quarter came in at -0.1%, missing the forecast of +0.4%. This is a second straight decline, which means that the eurozone's second-largest economy is technically in a recession.
Will we see a return to inflation jitters? Investors are keeping a keen eye on the Core PCE Price Index, which will be released later on Friday (12:30 GMT). PCE is the Fed's preferred inflation gauge, so a strong rise could reignite speculation that the Fed could tighten policy by reducing its massive stimulus programme. The consensus is for PCE to rise to 2.9% YoY in April, up from 1.8% a month earlier. If the release is within expectations, the US dollar could respond with gains.
EUR/USD faces resistance at 1.2242. Above, there is resistance at 1.2303. On the downside, there is support at 1.2123, followed by 1.2065 New Zealand dollar soars on RBNZThe New Zealand dollar has recorded sharp gains on Wednesday. In the European session, NZD/USD is trading at 0.7303, up 1.02% on the day.
As was widely expected, the Reserve Bank of New Zealand maintained its policy settings and kept the Official Cash Rate (OCR) at 0.25%. The RBNZ also upgraded its economic forecasts for 2o21. This was not a surprise, given the economy's strong recovery. However, the rate statement was more hawkish than the market had expected, in particular the forward guidance as to a potential rate hike. The central bank's OCR projection suggested that we could see a rate hike as early as the fourth quarter of 2022. Ahead of the policy meeting, the well-respected Westpac Group said that they did not expect a rise in rates prior to 2024. The potential of a rate hike occurring much earlier than expected has sent the New Zealand dollar sharply higher.
Will the RBNZ be able to deliver on a rate hike late next year? That will depend on the strength of the economy, in particular, the inflation and employment situation. It is a hazardous game to predict rate hikes, as we saw Westpac forced to wipe egg off its face after its forecast for a rate hike was way off the mark.
It's been a banner week for the kiwi, which has racked gains of 1.8 per cent. The US dollar continues to stumble and is broadly weaker against the majors. We could still see further movement this week, as the US releases key data.
The highlight is US Preliminary GDP for the first quarter, which will be released on Thursday. The initial estimate came in at 6.4%, and the consensus for the second estimate has been upwardly revised to 6.5%. This will be followed on Friday by the Core PCE Price Index, which is the Federal Reserve's preferred inflation gauge. The index is expected to rise to 0.6% in April, up from 0.4%. With higher inflation still a concern, a higher reading than the consensus could boost the US dollar.
NZD/USD is testing resistance at 0.7239, which has held since February 26. Above, there is resistance at 0.7314. There is support at 0.7120 and 0.7076
. New Zealand dollar continues to gain groundThe New Zealand dollar continues to head higher this week. In the North American session, NZD/USD is trading at 0.7244, up 0.37% on the day. It has been a strong start to the week for the New Zealand dollar, which is up 0.95%.
The US dollar is once again struggling against the major currencies. Inflation surged in April, which led to speculation that the Fed might contemplate scaling back QE. This gave the US dollar a brief boost earlier in May, but the market appears to have accepted the Fed line that higher inflation is transitory and any tightening of policy is a while off. The Federal Reserve continues to send out a consistent, clear message to the market that its ultra-accommodative policy will continue and that will maintain current QE levels. With a tighter policy unlikely in the short term, the US dollar has become less attractive to investors.
The Reserve Bank of New Zealand holds its policy meeting on Wednesday. New Zealand data has been strong, but there are concerns of reflation as the economy heats up. The central bank is expected to sound dovish, with no changes forecast in policy. Still, given the strength of the economic recovery, investors will be looking for any hints of potential tapering to QE, which would be bullish for the New Zealand dollar.
Westpac expects the RBNZ to upwardly revise its economic forecasts for 2021. It also is projecting that inflation will easily surpass 2 per cent this year, but adds that the RBNZ has anticipated this and will view higher inflation as transitory. We have seen this script with the Federal Reserve, which has dismissed a recent surge in inflation as merely temporary. Finally, Westpac does not expect the central bank to hike rates before 2024.
NZD/USD is testing resistance at 0.7239. Above, there is resistance at 0.7314. There is support at 0.7120 and 0.7076
. GBP climbs on strong job data, CPI nextThe British pound touched a 3-month high earlier on Tuesday, when GBP/USD reached a high of 1.4220. In North American trade, the pair is trading at 1.4200, up 0.49% on the day.
The pound received a lift from positive UK employment numbers, which were released earlier in the day. The unemployment rate for March dipped to 4.8%, down from 4.9% and a 6-month low. The number of unemployed persons in April fell by 15.1 thousand, outperforming the consensus of a rise of 25.6 thousand. This figure was all the more impressive given the recent lockdown. Wage growth slowed to 4.0%, down from 4.5%, but investors didn't let this get in the way of positive sentiment towards the pound, which pushed into 1.42-territory.
The surge in consumer inflation sent the dollar higher last week and has led to speculation that the Fed may have to reexamine its ultra-accommodative monetary policy. Fed member Robert Kaplan broke ranks with Fed Chair Jerome Powell earlier this month and urged the Fed to start to discuss tapering its USD120 billion per month in asset purchases sooner rather than later. Still, the Fed line remains that any inflation surge is temporary and there are no plans to taper QE anytime soon.
The Fed has long held that it would allow inflation to temporarily run above its target of 2 per cent. The key question is whether the April CPI numbers are a one-time blip or has inflation risen to a sustainable higher level. The market reaction to the CPI report was sharp, with equities falling and the US dollar gaining strength. Another release which points to higher inflation would again raise speculation that the Fed may have to tighten policy. This would be bullish for the US dollar.
GBP/USD is testing resistance at 1.4180, followed by resistance at 1.4262. There are support lines at 1.4003 and 1.3908. CAD powers higher, all eyes on NFPThe Canadian dollar has posted slight losses on Friday. In the North American session, USD/CAD is trading at 1.2176, up 0.22% on the day.
The Canadian currency continues to head higher. On Thursday, the Canadian dollar sparkled, gaining 0.95%, its highest 1-day gain in 2021. USD/CAD fell 2.15% in April and is down 0.95% so far in May, as the Canadian dollar is trading at its highest level since September 2017.
Canada has a commodity-based economy, and this week's rally in oil prices has lifted the Canadian dollar. As well, copper is trading at an all-time high, and Canada is one of the world's major copper producers. A stronger global demand for commodities bodes well for the Canadian dollar.
All eyes will be on US nonfarm payrolls for April, which will be released on Friday (12:30 GMT). The ADP Employment Report is not considered a reliable gauge for the official NFP, but investors couldn't help notice that the ADP reading jumped to 742 thousand, up from 514 thousand. Nonfarm payrolls climbed to 916 thousand in March and with a forecast of 990 thousand, a reading above the symbolic one-million mark is certainly within reach. If nonfarm payrolls outperforms, it would be another signal that the US economy is well on the road to recovery.
Canada will also release key employment numbers on Friday (12:30 GMT). However, unlike the US, the consensus is for a dismal release for April. The economy produced some 303 thousand new jobs in March, but investors are bracing for a sharp downturn in April, with a forecast of -160 thousand. The unemployment rate is expected to rise to 7.8%, up from the current 7.5%. If the readings fall within expectations, the Canadian dollar's party this week could come to an end.
On the upside, there is resistance at 1.2435 and 1.2575. USD/CAD is testing support at 1.2210. Below, there is support at 1.2125
China tensions weigh on Aussie, NFP loomsThe Australian dollar is slightly higher in Thursday trade. In the North American session, AUD/USD is trading at 0.7756, up 0.12% on the day. On the fundamental front, the RBA releases its quarterly policy statement on Friday (1:00 GMT).
Relations between China and Australia continue to spiral downwards. China has engaged in a trade war against Australia, which included tariffs on Australian wine exports in November. Last month, the Australian government made the unusual move of cancelling an infrastructure agreement between China and the State of Victoria, which was connected to China's Belt and Road initiative. Predictably, the move was harshly criticised by the Chinese government.
The latest salvo was fired earlier on Thursday, as China said it was indefinitely suspending the China-Australia Strategic Economic Dialogue. The dialogue has been frozen since 2017, so the move appears to be largely symbolic. The huge trading relationship between the countries will likely not be affected, such as Australian exports of iron ore to China. Still, the announcement of the suspension of the dialogue was enough to send the Australian dollar briefly lower. If there are further negative political developments between the two countries, the Aussie could face a bumpy road.
All eyes will be on US nonfarm payrolls for April, which will be released on Friday (12:30 GMT). The ADP Employment Report is not considered a reliable gauge for the official NFP, but investors couldn't help notice that the ADP reading jumped to 742 thousand, up from 514 thousand. Nonfarm payrolls climbed to 916 thousand in March and with a forecast of 990 thousand, a reading above the symbolic one-million mark is certainly within reach. If nonfarm payrolls outperforms, risk sentiment would improve, which would be bearish for risk commodities like the Australian dollar.
New Zealand dollar jumps after FOMC meetThe New Zealand dollar has steadied on Thursday after posting strong gains a day earlier. Currently, NZD/USD is trading at 0.7260, up 0.07% on the day. The pair has climbed 0.85% so far this week.
The New Zealand dollar continues to gain ground against the struggling US dollar. The kiwi has flexed its muscles in April, with sizzling gains of 3.97% this month, erasing the losses sustained in March. The FOMC meeting, which was passed without incident, saw the US dollar retreat broadly against the major currencies.
The FOMC meeting did not contain any surprises, as the Fed remained in dovish mode. However, a close look at the language of the rate statement and Fed Chair Powell's follow-up remarks revealed a few subtle changes from previous meetings. The Fed acknowledged progress in the battle to control Covid-19 and the strengthening of the US labour market, stating:
Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened".
When Powell was asked specifically about tapering, he replied that it was too early to have a conversation about that. This sent US yields lower, dragging down the US dollar.
With the FOMC meeting out of the way, the markets can now focus on key economic releases. The US releases first-estimate GDP for Q1 on Thursday (12:30 GMT), and the consensus is for a strong gain of 6.8%, after a 4.3% gain for Q4, which was revised upwards from 4.0%. A print of 6.8% or higher could shake up the US bond market and send yields higher, which would likely give the US dollar a much-needed boost.
In New Zealand, business confidence improved to -2, up from the preliminary reading of -8.4 points. With the global demand growing for New Zealand commodities and stable domestic activity, I would expect business confidence to continue to improve in the coming months.
NZD/USD is testing resistance at 0.7243. This is followed by resistance at 0.7291. There is support at 0.7135 and 0.7075
Australian dollar dips as inflation missesThe Australian dollar is down slightly in the Wednesday session. In the North American session, AUD/USD is trading at 0.7747, down 0.27% on the day.
Australian CPI posted a gain of 0.6% in the first quarter of the year, down from 0.9% in Q4 of 2020. The read was certainly respectable, but underperformed, as the estimate stood at 0.9%. Trimmed CPI, which excludes the most volatile items, dropped from 0.4% to 0.3% and missed the forecast of 0.5%. The weak readings have sent the Australian dollar lower.
The lower than expected inflation numbers will lessen any pressure that was on the RBA to tighten policy due to stronger economic conditions. Australia has extricated itself in admirable fashion from the downturn due to Covid, although the vaccine rollout has been sluggish.
The RBA has been cautious and says that it does not expect GDP or employment to reach pre-pandemic levels until later in the year. Once the economy reaches that level, there is a good chance that the RBA could tighten policy, such as easing QE, as we saw with the Bank of Canada earlier this month.
What can we expect from the FOMC meeting later today (18:00 GMT)? Expectations for a dramatic announcement are low, as the Fed does not appear in any hurry to tighten policy, even with a rapidly improving US economy.
The market seems to have bought into the Fed's message that even though inflationary pressures are growing, QE will not be reduced for a while yet. In follow-up comments to today's meeting, Fed Chair Powell is likely to wax positive about the economy but simultaneously state that the economy is still in recovery mood and needs the Fed to keep its foot on the pedal.
Unless the Fed surprises with a more hawkish rate statement than expected, it should be "business as usual" after the meeting, which means that the US dollar could find itself under pressure from the major currencies.
On the upside, 0.7813 has some breathing room in resistance as AUD has lost ground. Above, there is resistance at 0.7887. On the downside, there are support levels at 0.7688 and 0.7627
Australian dollar dips, CPI nextThe Australian dollar has reversed directions on Tuesday and recorded slight gains. In the European session, AUD/USD is trading at 0.7781, down 0.22% on the day.
Australian CPI showed a strong gain of 0.9% in the fourth quarter, and an identical gain is projected for the first quarter of the year. The economy is performing well, boosted by stronger demand for Australian commodities and ultra-low interest rates. Unemployment has been falling, undeterred by the end of the JobKeeper employment programme at the end of March.
Not surprisingly, inflation is also showing strength, reflective of the positive economic conditions. Consumers are again spending, as Retail Sales rebounded in March with a gain of 1.4%, after a decline of 0.8% beforehand. This beat the forecast of 1.0%. The economy continues to grow after being reopened, and consumer spending is expected to be a key driver in the economic recovery. The RBA is projecting that GDP and employment will reach pre-pandemic levels later in 2021, which is 6-12 months faster than the central bank had expected.
In addition to stronger domestic demand, Australia stands to benefit from a more robust global economy, which will translate into stronger demand for Australian exports. This bodes well for the Australian dollar, which has a tight correlation with commodity prices.
Despite the rosy economic picture, the RBA remains cautious and has not given any indication that it plans to raise interest rates or even taper its QE programme. At its last meeting, the bank noted that inflation remains low and below the central bank's target, which is between 2-3 per cent. The bank added that although the employment picture has improved, unemployment still remains too high for its liking.
AUD/USD is putting strong resistance at 0.7813. Above, there is resistance at 0.7887. On the downside, there is support at 0.7688, followed by support at 0.7627 Pound steadies on sharp Construction PMIThe British pound has reversed directions on Thursday and posted slight gains. Currently, GDP/USD is trading at 1.3759, up 0.16% on the day.
It has been a week of sharp swings for the pound. The week started with GBP/USD punching above the 1.39 line, but the pair could not hold on to these gains and fell close to the 1.37 level, before steadying on Thursday. Investors ditched the pound as the AstraZeneca vaccine remains under scrutiny. The European Medicines Agency said there was a possible link with rare blood clots, and the UK responded by saying it would offer alternatives to AstraZeneca. This led to GBP/USD and EUR/GBP recording sharp losses during the week.
Overshadowed by the news over AstraZeneca were fine performances by UK PMIs for February. On Wednesday, Services showed strong growth, as the PMI accelerated from 49.5 to 56.3, well above the neutral 50-level. This was followed by a sparkling Construction PMI, which jumped from 53.3 to 61.7, its highest level since September 2014.
A successful vaccine rollout in the UK has allowed the government to continue lifting health restrictions, which is boosting economic activity.
The FOMC minutes reiterated that the Fed remains in dovish mode, despite the improvement in the US economy. Policymakers at the Fed remain firmly of the view that the US economy still requires support until the recovery has deepened. With significant slack in the economy, inflation remains at low levels. The Fed believes that any rise in inflation due to improving economic conditions will be temporary. There had been some speculation that FOMC members might hint at a tapering of QE, given the sharp improvement in employment numbers, but the minutes made clear that any tapering of QE is off the table for the time being.
On the downside, GBP/USD continues to test support at 1.3742. Below, there is support at 1.3650
1.3889 is the next resistance line, followed by resistance at 1.3944
