Can the Dollar Find Traction Even if the Employment Data Disappoint?

Overview: The global equity rally picked up this week as it closed in 2019.  The MSCI Asia Pacific Index gained today and is up in nine of the past 10 sessions.  It has fallen only in one week since the end of October.  South Korea's Kospi led today's advance with a nearly 4% rally on the back of talks that were later played down between Hyundai and Apple.  Europe's Dow Jones Stoxx 600 is at its best level today since last March and is posting gains for the fourth consecutive week.  US shares are trading higher after the major benchmarks rallied to new record highs yesterday. The backing up of yields, led by the US this week, did not damage those animal spirits.  After rising more than 15 bp this week, the US 10-year benchmark is flat today (~1.08%), while European yields are lower as peripheral bonds outperform the core.  The widening US premium may be part of the dollar's upside correction story we suggested for the first part of the New Year after sharp losses into the end of last year. However, after this week's events both with the virus and drama in Washington, the argument that the bad news has been discounted may be somewhat less convincing.  In any event, the dollar is firmer today.  Among the majors, its gains are concentrated against the complex of European currencies, though sterling is a notable exception, largely holding its own against the greenback.  Emerging market currencies are also mostly heavier after the JP Morgan Emerging Market Currency Index fell by more than 1% yesterday, its largest decline since last September.  Rising yields also appear to have dimmed gold's luster.  In the middle of the week, it has tested $1960 and was sold through the five-week uptrend line just above $1900 today.  Stop-loss selling saw gold drop below $1880 before finding a bid.  Oil is part of the reflation trade, and it is at its best level since last March.  February WTI is a little above $51.  It, too, has been up every week since the end of October, but one.  It settled a little below $36.60 at the end of October.   Brent is above $55 a barrel for the first time since last February.  

Asia Pacific

The major benchmarks providers have announced plans to drop the three Chinese internet companies, China Mobile, China Telecom, and China Unicom, at the US's insistence.  We suspect that the incoming Biden administration will not be in a hurry to unwind these latest moves by the US.  First, the desire for a stronger confrontation with China is bipartisan.  Second, realpolitik considerations argue against a unilateral easing of sanctions.  Get a concession.  Third, there are other and higher priorities.  

After reporting more than twice the decline expected in November's labor cash earnings (-2.2%) yesterday, Japan reported a larger than expected increase in household spending.  Economists Bloomberg surveyed had a median forecast for a 1% decline, and instead, spending rose 1.1% (year-over-year). Yet, there are signs of weakness, which may be the true signal.  It did slow from the 1.8% pace in October, and spending on utilities (stay-at-home more) was the largest contributor, and the period covered an extra weekend.  The jury may still be out.  More data is needed.  

Recall the sequence of events.  The dollar reached a nine-month low in the middle of the week against the Japanese yen (~JPY102.60) but closed above JPY103.00.  Yesterday, the Ministry of Finance indicated that officials were watching the markets closely and that the government and the central bank would work together as needed.  The dollar reached almost JPY104 toward the end of the European session yesterday.  It was confined to about 20 pips below it in the local session today before pushing briefly above it in Europe.  We note that the US-Japan 10-year rate differential has moved above 100 bp this week to reach its highest level since March.   The bottom was in early August, a little below 50 bp.  It was just shy of 200 bp at the end of 2019.   The Australian dollar continues to consolidate after poking above $0.7800 earlier this week.  Support has been seen in the $0.7725-$0.7730 area.  A large (A$1.2 bln) option expires at the lower end of that range on Monday.  Since the Chinese yuan's surge at the start of the week, it too has been consolidating.  The PBOC set the dollar's reference rate at CNY6.4708, a little softer than the models suggested.  The PBOC took two steps today.  Through its operations, it signaled displeasure with local banks round-tripping by borrowing cheap cash that the central bank provided into the money markets and bought bonds.  Second, it reduced the number of market-making banks in the foreign exchange market from 32 to 25.  It was signaled a month ago.  Typically, officials publish a list of market-makers every two years, and the last time was 2019.  


The US suspended plans to add levies on $1.3 bln of French goods that were supposed to come into effect yesterday in retaliation for Paris's move to tax large global tech companies (mostly US companies).  The announcement indicated that the US wanted to coordinate its response with its efforts in similar disputes with other countries.  Of course, one solution is a multilateral agreement, but so far, it has proven elusive.  That said, Trump enjoyed bipartisan support for the efforts to "defend the US tax base."  

Italy's Prime Minister Conte has modified the proposed spending plans, fully using the EU's recovery package.  He shifted some of the spending priorities.  The goal here is not just economic, but political as former Prime Minister Renzi has threatened to topple the government for the lack of ambition of the first proposals.  The markets have not been distracted by Italian politics.  The 10-year government bond yield is at a record low today, just north of 50 bp, and the premium Italy pays over Germany is the narrowest in almost five years.

Euro longs are being liquidated ahead of the US jobs data.  It set a new low for the week today, a little below $1.2215.  The midweek peak was near $1.2350.  There are large (3.8 bln euros) in options expiring Monday at $1.2995-$1.3000.  The 20-day moving average is found near $1.2230.  The euro has not closed below this moving average since mid-November.  A break of $1.2200 would initially target the $1.2130 area.  Sterling is holding in a bit better today, remaining in yesterday's range that extended a little through $1.3535, about where the 20-day moving average is found.  Sterling is gaining on the euro for the second consecutive session, unwinding earlier gains.  Lastly, note that Fitch reviews the UK credit rating today.  It currently has it at AA- (since last March).  


The political drama that captivated the world has quieted.  Trump is most likely to complete his term with less than two weeks.  There does not seem to be the necessary support to invoke the 25th Amendment or time for impeachment.  The market's attention turns to the US jobs report. The risks are clearly on the downside of the 50k median forecast in the Bloomberg survey after the ADP and ISM services employment had substantial negative surprises.  Unemployment may have risen for the first time in eight months.  The service sector has likely been hard hit, and many states had implemented new social restrictions as the virus surged.  To be sure, some economists look for an outright loss of jobs.  We suspect there is headline risk with a disappointment, but given the news, most investors already understand that the contagion impacts public health dramatically and the economy.   Ideas that the Biden Administration will boost stimulus as the vaccine's rollout continues to mitigate the near-term trepidation.   

Canada also reports December employment data, and the surging virus is expected to generate a weak report.  The Bloomberg survey finds a median forecast of a 37.5k loss in Canadian jobs last month.  It would be the first loss of jobs since last April, though, of course, job growth has been slowing after the initial surge.  The unemployment rate may tick up to 8.7% from 8.5%.  Note that Canada lost about 3 mln jobs last March and April, and through November, roughly 2.4 mln employees returned.  

The US dollar recorded its lowest level since April 2018 against the Canadian dollar in the middle of the week, near CAD1.2630.  It recovered to around CAD1.2735 yesterday and is consolidating in a narrow range today, ahead of the employment reports, above CAD1.2670.  Our bias is for a US dollar upside correction.  The Mexican peso may be showing the way.  The US dollar bottomed midweek near MXN19.60 and jumped to almost MXN20.09 yesterday, and settled above MXN20.00 for the first time since December 28.  Trading has been choppy, and the high for the week was set on Tuesday around MXN20.1050.  As part of a broader dollar recovery, the greenback can rise toward MXN20.15 initially and then MXN20.25.  


Can the Dollar Find Traction Even if the Employment Data Disappoint? Can the Dollar Find Traction Even if the Employment Data Disappoint? Reviewed by Marc Chandler on January 08, 2021 Rating: 5
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