US rally leaves little for NFP to surprise traders
US Dollar
The dollar took aggressive stance on Wednesday as investors await bullish comments from the Fed and White House while troubled New Zealand Dollar was rescued by a strong labor market report.
The basket of major currencies fell against the greenback, however last week's high at 95.00 seems to have to be conquered again.
The Fed's November meeting is of little interest to investors as the position of regulator for the December meeting is pretty clear, and there is no point in talking about distant prospects, given that Yellen's term is coming to an end in February. A much more important event will be the announcement of a new head of the Fed on Thursday, where the views converge on Yellen’s colleague Jerome Powell. The market estimates his chances at 85%. Powell is a famous follower of gradualism, so his appointment will probably disappoint the markets and will deprive the dollar of some support. For the US stock markets, amid the economic recovery and the tax reform, the prospect of a sluggish Fed is likely to revive interest for staging new records.
Later on Wednesday there will be news on tax reform, in particular the plans of Treasury for auctions to finance the deficit.
Despite the large number of seemingly bullish events for the dollar, I would recommend refraining from buying it until the uncertainty is eliminated. All data indicate a strong report on employment in the US on Friday, but all this should be seen in the context of accelerating growth after natural disasters. The long-term dynamics of the dollar will be determined by the tax reform and the appointment of the head of the Federal Reserve.
In favor of strong NFP report there is an increase in consumer confidence and spending, which also prepares favorable ground for the fourth quarter GDP performance. The early start of the heating season and the seasonal increase in energy prices will create additional inflationary pressures on the economy, which, together with rising oil prices, will have a multiplier effect.
New Zealand Dollar
Economic recovery also reached New Zealand, where unemployment fell to 4.6%, which triggered a wave of long positions for NZD and NZDUSD growth of 0.9%. Suddenly, a steep exchange rate rise after robust labor data was a "relief" rally after the new government announced the isolationist measures - preventing foreign investment and migration. Nevertheless, the policy will take its toll and we can expect further weakening of the New Zealand dollar.
British Pound
The British pound jumped to the high of October on Tuesday, after the European official in charge of Brexit talks, said he was ready to accelerate negotiations on the country's exit from the bloc, thus significantly boosting the spirit of investors who still hope for a pound gain. Theresa May’s spokeswoman also reported on the hiring of thousands of customs officers at the new borders with the European Union - which also signaled the imminent announcement of the final exit conditions.
On Thursday, the Bank of England will hold a meeting, which is likely to announce an increase in the interest rate by 0.25% - for the first time in 10 years. The head of the bank, Mark Carney, took advantage of this monetary tool when he announced the need to rate hike at the previous meeting (which caused the pound to rise to 1.36), so in search of arguments for a strong currency again, he needs to show the readiness of the bank to any consequences of Brexit. With the global economic recovery, rising oil prices, there is a chance that he will have the courage to be more aggressive than expected.
Arthur Idiatulin
The dollar took aggressive stance on Wednesday as investors await bullish comments from the Fed and White House while troubled New Zealand Dollar was rescued by a strong labor market report.
The basket of major currencies fell against the greenback, however last week's high at 95.00 seems to have to be conquered again.
The Fed's November meeting is of little interest to investors as the position of regulator for the December meeting is pretty clear, and there is no point in talking about distant prospects, given that Yellen's term is coming to an end in February. A much more important event will be the announcement of a new head of the Fed on Thursday, where the views converge on Yellen’s colleague Jerome Powell. The market estimates his chances at 85%. Powell is a famous follower of gradualism, so his appointment will probably disappoint the markets and will deprive the dollar of some support. For the US stock markets, amid the economic recovery and the tax reform, the prospect of a sluggish Fed is likely to revive interest for staging new records.
Later on Wednesday there will be news on tax reform, in particular the plans of Treasury for auctions to finance the deficit.
Despite the large number of seemingly bullish events for the dollar, I would recommend refraining from buying it until the uncertainty is eliminated. All data indicate a strong report on employment in the US on Friday, but all this should be seen in the context of accelerating growth after natural disasters. The long-term dynamics of the dollar will be determined by the tax reform and the appointment of the head of the Federal Reserve.
In favor of strong NFP report there is an increase in consumer confidence and spending, which also prepares favorable ground for the fourth quarter GDP performance. The early start of the heating season and the seasonal increase in energy prices will create additional inflationary pressures on the economy, which, together with rising oil prices, will have a multiplier effect.
New Zealand Dollar
Economic recovery also reached New Zealand, where unemployment fell to 4.6%, which triggered a wave of long positions for NZD and NZDUSD growth of 0.9%. Suddenly, a steep exchange rate rise after robust labor data was a "relief" rally after the new government announced the isolationist measures - preventing foreign investment and migration. Nevertheless, the policy will take its toll and we can expect further weakening of the New Zealand dollar.
British Pound
The British pound jumped to the high of October on Tuesday, after the European official in charge of Brexit talks, said he was ready to accelerate negotiations on the country's exit from the bloc, thus significantly boosting the spirit of investors who still hope for a pound gain. Theresa May’s spokeswoman also reported on the hiring of thousands of customs officers at the new borders with the European Union - which also signaled the imminent announcement of the final exit conditions.
On Thursday, the Bank of England will hold a meeting, which is likely to announce an increase in the interest rate by 0.25% - for the first time in 10 years. The head of the bank, Mark Carney, took advantage of this monetary tool when he announced the need to rate hike at the previous meeting (which caused the pound to rise to 1.36), so in search of arguments for a strong currency again, he needs to show the readiness of the bank to any consequences of Brexit. With the global economic recovery, rising oil prices, there is a chance that he will have the courage to be more aggressive than expected.
Arthur Idiatulin
This analysis is provided as general market commentary and does not constitute investment advice. Past performance is not indicative of future results
