FX market outlook

FX market outlook

Dollar down, stocks up on Powell’s flexible policy; China boosts liquidity

Nonfarm payrolls impress but Powell holds cautious; China takes further monetary easing steps

The US Jobs report bested expectations on Friday, brushing away fears of a cooling labour market and a slowing economy. Nonfarm payrolls jumped by 312k in December, while November’s print was revised upwards by 22k. Average hourly earnings also picked up speed to reach a new decade high of 3.2% y/y compared to 3.1% registered previously, while the unemployment report increased by 0.2 points to 3.9%, though remained among historic lows.

The upbeat employment report suggests that the Fed could still raise interest rates in the new year, though the Fed chief Jerome Powell speaking on Friday messaged that monetary policy is flexible and hence monetary tightening is not predetermined. The latter accompanied with hopes that trade negotiations between the US and China could reach a deal soon pushed Dow and S&P 500 up by more than 3.0% on Friday. Asian stocks closed in the green as well on Monday, helped by Friday’s news that China’s central bank released $116 billion for new lending by cutting reserve requirements at the upper end of market expectations. The action came a few days after a private survey showed a contraction in Chinese manufacturing activity and the tech-giant Apple slashed sales forecasts. Note that this is the fifth time in a year the PBOC reduces the amount of cash banks hold.

European stock futures are currently trading with moderate gains, pointing that European equities will also benefit from some risk-on later today.

Dollar under pressure, antipodeans advance

In FX markets, the dollar index extended losses for the third day in a row, while dollar/yen was erasing Friday’s rally at 108 as investors felt more comfortable to shift funds to riskier assets. On the other hand, the aussie and the kiwi which are sensitive to Chinese economic headlines were recovering, reaching two-week highs against the greenback. The safe-haven gold was also paring Friday’s losses to touch 6 ½ -month highs again, a sign that that some risk aversion remains in the markets.

Loonie hits fresh 3-week highs as oil prices continue recovery

The Canadian labour market also registered a pleasant month in December, with the economy creating 9.3k jobs instead of 5.5k expected by analysts. While this was still well below the explosive 94.1k increase marked in November, the unemployment rate slipped to a fresh record low of 5.6%. Yet average hourly earnings remained subdued at 1.5%, reinforcing expectations that the BoC will keep rates unchanged this week.

Yet the oil-linked loonie managed to attract some buying interest and hit fresh three-week highs versus the dollar , as crude prices stretched north for the fourth consecutive day amid trade optimism. The EIA oil report disappointed by showing a minimal increase in US crude inventories in the week ending December 28, whereas Baker Hughes reported a smaller number of active US oil drillings. Dolla

Other highlights

ISM non-manufacturing PMI readings and house data could move the dollar in the remainder of the day, while earlier retail sales and the Sentix investors confidence index might bring some volatility to the euro after flash core CPI figures for the month of December appeared discouraging on Friday.

Brexit headlines will be closely watched as markets are eagerly looking to see whether May can achieve the assurances British lawmakers ask to approve her Brexit plan. Note that a Parliamentary vote is anticipated to take place in the week beginning January 14. However, rumors have started to spread that May could postpone the vote once again.