- Europe: Stocks are set to open higher amid an improvement in global risk sentiment, thanks to BoE’s stimulus package. The era of free money is not over yet and this is very good news for the equity market.
- The USD was on the back foot as traders await July's Nonfarm payrolls
- We maintain our long-term view that the dollar will continue dropping against the backdrop of failed expectations that a rate hike will happen
- Risk is mostly on the downside for the dollar as an extremely bullish job report will be needed to revive expectations for a Fed rate hike before year-end
- BoE will have little room to manoeuvre before switching to negative interest rates as the market will switch focus to the government and the announcement of a potential fiscal package
- GBP/USD is now at the bottom of its monthly range and will most likely remain within the 1.30-1.35 area in the coming days
- NZD/USD is currently testing the 0.7182-0.72 resistance area ahead of next week’s RBNZ meeting, the risk is clearly on the downside as we expect the Reserve Bank to slash the official cash rate by 25bps to 2.00%
The USD is on the back foot on Friday as traders await the July Nonfarm payrolls. The US economy is expected to have created 180k private jobs last month, while the unemployment rate is forecast to have fallen to 4.8% from 4.9% in June. Finally, earnings should continue to grow at a stable rate (0.2%m/m and 2.6%y/y), suggesting that the Fed will have to find another catalyst to boost inflation. All in all, the risk is mostly on the downside for the dollar as an extremely bullish job report will be needed to revive expectations for a Fed rate hike before year-end. The dollar index edged down 0.07% in Tokyo as the single currency rose 0.10%, the pound 0.15% and the yen 0.15%.
Yann Quelenn, market analyst: “A week after the FOMC, the market is scrutinising every morsel of information for hints that monetary policy will be tightened. Today's NFPs will be no different. Earlier this week, the ADP slightly beat expectations with a 179k new jobs’ print vs consensus of 170k. However when it comes to predicting the outcome of NFPs, the ADP has missed the mark for the last two releases. Indeed May and June NFP releases were very volatile and strong deviations have been experienced from consensus forecasts and on top of that in negative directions. May's data was one the weakest NFPs since 2010 with 38k vs 170 expected while June data was amazingly good with 287k vs 175 expected.
Today expectations remain high with consensus betting on the creation of 180k new jobs. Markets are still assessing a 37.3% probability of a rate increase for this year. We maintain our position that the Fed is dovish and not ready to take further action that would weigh on the American economy. The US election will provide the Fed with its next excuse for not raising rates. Tightening monetary policy is way more than just having strong jobs data and an inflation that is headed towards the target. The reality is that 15% of the US population is on food stamps which represent nearly 50 million Americans. The Fed wants to appear hawkish but is actually dovish. Currency-wise, we maintain our long-term view that the dollar should continue dropping on the back of continued failed expectations that a rate hike will happen.” ---
The Bank of England unveiled a fresh stimulus packages yesterday at its August meeting. The MPC members voted unanimously to cut interest rates by 25bps, which brought the main interest rate to almost zero, down to 0.25%. The central bank also raised the asset purchase for government bonds to £435bn from £375bn initially. All in all the new measures are aiming to bolster the country’s outlook after policymakers revised growth forecasts sharply lower. During the press conference, governor Carney left the door wide open for another cut but ruled out negative interest rates and the use of “helicopter money”. As discussed yesterday, the BoE has little room left to manoeuvre before switching to negative interest rates. The market will therefore switch focus to the government and the announcement of a potential fiscal package. GBP/USD dropped 1.75% to 1.3130 amid the decision. The currency is now at the bottom of its monthly range and will most likely remain within the 1.30-1.35 area in the coming days.
The Kiwi was the best performing currency among the G10 complex as it rose 0.35% against the greenback. NZD/USD is currently testing the 0.7182-0.72 resistance area (Fibonacci 61.8% on July’s debasement and psychological) but is lacking momentum to clear the resistance area. Ahead of next week’s RBNZ meeting, risk is clearly on the downside as we expect the Reserve Bank to slash the official cash rate by 25bps to 2.00%. Moreover, the recent gains were mostly attributable to a dollar weakness rather than a strong interest for the Kiwi.
Asian equity markets were trading mostly higher as Japanese and mainland Chinese shares struggled to move into positive territory while the Australian, New Zealand, South Korean and offshore Chinese markets were blinking green across the screen. In Europe, stocks are set to open higher amid an improvement in global risk sentiment, thanks to BoE’s stimulus package. The era of free money is not over yet and this is a very good news for the equity market.