Non-farm payrolls boost USD Friday’s better-than-expected non-farm payrolls figure gave the USD a huge boost. The upward revision to previous months’ figures and the rise in average hourly earnings confirms that the labor market is strengthening. The implied interest rate on the longer-dated Fed funds futures jumped 20 bps as investors are now firmly convinced that the Fed will indeed begin normalizing rates this year. The monetary divergence should continue to push the dollar higher, in my view.
This week’s battlefront in the indirect currency wars The theme in the FX market nowadays is the indirect currency wars. Last week was the turn of the People’s Bank of China (PBOC), which cut the rate on bank reserves. The Reserve Bank of Australia (RBA) also cut rates by 25 bps because of lower inflation and an overvalued exchange rate. This was one of the clearest examples of a “currency war.”
This week, the spotlight will be on the Riksbank and the Bank of England quarterly inflation report. Will Sweden be the next central bank to ease policy? On the contrary, the positive data from the country recently suggest an improvement in the economy towards the end of last year, in our view. We expect that the improving fundamentals could take the pressure off from the Riksbank to introduce additional measures, at least for the time being. Even just holding steady could be SEK-positive in the context of today’s currency wars. As for the Bank of England, the two policy makers who had been voting for a rate increase last month joined the other members in voting for to keep rates steady, because of the increased risk of prolonged low inflation. The November inflation report warned that inflation was expected to fall below 1%. This time, they might say that inflation could even turn negative over the next couple of months. That could push rate expectations out further and weaken the pound.
Oil continues its recovery Oil prices continued to rise on Friday and this morning are up on Friday’s opening levels. One indication of the trend is that the oil price seems to have decoupled from the dollar – the dollar rallied sharply after Friday’s payroll figures, but crude prices continued to gain nonetheless. This suggests that speculators and hedge funds are cutting their short positions. It appears that the sellers who took the price down from USD 60 bbl to USD 40 bbl were not oil traders but rather were speculators. As they close out their positions, the price is coming back. It could recover further if they continue to trim shorts.
China’s trade surplus hit a record in January, but it was bad news for the commodity currencies, because the driving force behind the surge was a collapse in imports (-20% yoy), not a rise in exports, which in the event fell 3.2% yoy. Falling commodity prices, weak domestic demand and falling exports all contributed to the decline in imports. The combination creates a dilemma for the authorities in targeting the exchange rate, because a record surplus would usually mean upward pressure on the CNY, yet falling exports argue for the opposite. The likely response will be more economic stimulus, such as interest rate or RRR cuts. On the other hand, if China continues to tolerate or even encourages CNY depreciation, that will exacerbate the deflationary threat that other countries face and intensify the global currency war.
Japan’s current account surplus for December beat expectations as the trade deficit was narrower than expected. Exports rose 19% yoy while imports rose only 6.7% as the value of crude oil imports fell 22% yoy. Moreover, income from investments continues to rise as the weaker yen improves the yen-denominated value of foreign-currency inflows. The current account has been in surplus since last April on a seasonally adjusted basis. This may mean some stability for the yen for now, unless and until the Bank of Japan decides on another round of easing measures.
Today’s highlights: During the European day, Germany’s trade balance for December is coming out.
The Swiss National Bank releases its weekly sight deposit data, which could reveal if the Bank intervened in the FX market in the week ended Feb. 6. Sight deposits rose further last week, adding to signs that the central bank has intervened to weaken the CHF since removing the currency's floor against the euro. Indications of further intervention could weaken CHF somewhat.
From Canada, we get housing starts for January.
The US labor market conditions index for January will be released. This monthly index draws on a range of data to give a better sense of overall employment conditions. It aims to produce a single measure to gauge whether the labor market is on the whole improving. In December, the index came 6.1, so a reading above that, following the solid employment report on Friday, would add to signs of an improving labor market and probably push the dollar higher.
Rest of the week: Tuesday, we get China’s PPI and CPI for January. The forecast is for the CPI and PPI to soften a bit suggesting that another rate cut may be needed on top of the cut in the reserve requirement ratio on Wednesday. In the UK, industrial production for December is coming out. In the US, the Job Offers and Labor Turnover Survey (JOLTS) will give further insights into the US labor market picture.
On Wednesday, Norway’s GDP rate for Q4 is expected to remain unchanged from Q3. Given the current low oil prices compared to the previous quarters, we will be watching if the decline in oil prices have affected the country’s growth rate.
Thursday is Central Bank day, as mentioned above. We also get US retail sales for January. Falling gasoline prices may make for a fall in the headline figure, but sales excluding autos and gasoline should rise, indicating that the quarter got off to a strong start.
Finally on Friday, the preliminary Q4 GDP figures for France, Germany and the Eurozone as a whole are coming out. Eurozone’s preliminary GDP rate for Q4 is expected to have remained unchanged from Q3, while figures released from Germany, Europe’s strongest economy are likely to show that the economy expanded moderately from Q3.