The US dollar is narrowly mixed as we head into the weekend. Global stock markets are also mixed. Although the Nikkei was down, Chinese equities eked out a small gain. The Shanghai Composite gained nearly 6% this week, the best in nearly two months. European bourses are mostly higher today, which only pares the week’s declines.
Investors should know five things before the weekend.
In further signs of an improving U.S. economy, both important unemployment claim statistics have fallen to their lowest level in nearly a generation and retail sales have shown a sharp increase.
Weekly initial unemployment claims rose to 274,000 in the week ending August 8, an increase of 1.9% from the previous week. However, the previous week’s level was revised by 1,000 to 269,000, and the 4-week moving average, which economists primarily use to see if a major trend is emerging in unemployment claims, fell by 1,750 from the previous week’s revised average.
The euro has rallied to new highs since mid-July, and after repeated attempts to convincingly break above JPY125, the dollar is retreating against the yen as well. The euro reached almost $1.1160. The next target is near $1.1200. The dollar is posting a potential key reversal against the yen by making a new high for the move before selling off through yesterday’s low. This bearish price action needs confirmation by a close below yesterday’s lows seen just above JPY124.50. Support is near JPY124.
The US dollar was unable to sustain its pre-weekend gains despite an employment report generally recognized to be sufficient to keep the Federal Reserve on course to raise rates next month. However, the poor price action has not seen follow through dollar selling. A consolidative tone has emerged as the markets await this week’s developments, especially the US retail sales and UK labor report. The Eurozone reports industrial output and, more importantly, Q2 GDP estimates.
Investors seem to take for granted the easier monetary policy trajectories in the Eurozone and Japan. The debate has been over the timing of the normalization in the US and the UK. Emerging talk recently said that the Bank of England could hike rates before the Fed was never very compelling. Last week’s developments increase the likelihood that the FOMC raises rates at least 5-6 months before the BOE.
While the US jobs report has been among the most important economic releases in the monthly cycle, it takes on even more significance in the run-up to the September FOMC meeting. The dollar has been trading in a narrow range.
There are three main talking points today: 1) The divergence in the trajectory of monetary policy, illustrated by Atlanta Fed’s Lockhart yesterday, and to be tested today by the ADP private sector employment estimate; 2) The July service sector PMIs; and 3) The IMF’s update on the yuan’s inclusion in the SDR
Narrow ranges in the foreign exchange market continued for the most part, and the US dollar is a little softer. The Reserve Bank of Australia did not talk the Aussie lower, and the data were better than expected. This sent the Australian dollar sharply higher. Its 1.25% gain is the biggest in two months. This coupled with gains in Chinese stocks (Shanghai Composite + 3.7%) and firmer commodity prices, including oil, are helping to lift the dollar-bloc currencies more generally.
The US dollar is mostly confined to the pre-weekend trading ranges as participants prepare for this week’s big events, which include the BOE meeting, minutes and new forecasts, and the US jobs report. The main exception is the Canadian dollar, which remains under pressure following the unexpected contraction in May, and the weekend call for national elections in October. The Canadian dollar is off nearly 0.5%, with the US dollar at new multi-year highs. Oil prices are at new six-month lows and they are taking a toll.
There are two events this week that will shape the investment climate potentially for the rest of the year. The first is the Bank of England meeting. The following day is the US employment report.
