US and Canada Jobs Data, Eurozone’s Inflation Under Investors’ Radar
The US dollar traded higher against the majority of the other major currencies yesterday and today in Asia, while EU and US indices closed in the red, perhaps as participants continued to trade based on the outcome of the FOMC minutes. Today, we have the US and Canadian employment reports for December, as well as Eurozone’s preliminary CPIs for the month, data which have the potential to shape expectations around the future course of action of the Fed, the BoC, and the ECB.
Equities Keep Sliding Ahead of NFPs, CAN Jobs and EZ CPIs Also in Focus
The US dollar traded slightly higher against most of the other major currencies on Thursday and during the Asian morning Friday. It gained against CHF, AUD, and slightly against JPY and EUR, while it was found virtually unchanged against NZD. The greenback underperformed notably against CAD, and slightly against GBP.
The strengthening of the US dollar suggests that market participants continued to trade based on the outcome of the FOMC meeting minutes. Remember that according to the minutes, officials said the “very tight” labor market may warrant sooner rate increases, as well as that they could also reduce their overall asset holdings to tame elevated inflation, another move that could be considered quantitative tightening. Indeed, the fact that this may have been the case is also supported by the equity market, where major EU and US indices closed in negative waters. Appetite improved during the Asian session today.
However, we are reluctant to say that the correction is over, and this is because, today, we get the US employment report for December. Nonfarm payrolls are expected to have accelerated to 400k from 210k in November, with the risks perhaps tilted to the upside. Although we usually don’t rely on the ADP report, Wednesday’s print came in at 807k, adding to the chances of an upside surprise in the NFPs. The unemployment rate is forecast to have ticked down to 4.1% from 4.2%, while average hourly earnings are forecast to have slowed on a yoy basis, to +4.2% from 4.8%. Although this is an indication of a potential slowdown in inflation in the months to come, it would still be well above the Fed’s objective of 2%. Thus, an upbeat report overall could add credence to the Fed’s view over a “very tight” labor market and may encourage market participants to bring further forth their expectations with regards to the Fed’s tightening plans. According to the Fed funds futures, investors are currently anticipating the first post-pandemic quarter-point hike to be delivered in May.
At the same time with the US employment report, we get jobs data for December from Canada as well. The unemployment rate is forecast to have held steady at 6.0%, but the employment change is expected to show that the economy added significantly less jobs than in November. At its latest meeting, the BoC kept interest rates untouched at 0.25%, and in the statement accompanying the decision, the language was more cautious than previously, with officials expressing concerns over the economic impact of the new coronavirus variant. That said, the Omicron strain proved to be milder than initially estimated, while yesterday, the nation’s trade data revealed that Canada recorded its biggest trade surplus since 2008, helped by record exports. Now, participants are currently pricing in five quarter-point rate increases by the BoC, which combined with the latest recovery in oil prices due to escalating unrest in OPEC+ member Kazakhstan and supply outages in Libya, could keep the Canadian dollar supported. Even if a potential slowdown in jobs growth results in a pull back in the Loonie, we expect it to be short-lived.
Ahead of those two employment reports, we get Eurozone’s preliminary inflation data for December. Both the headline and core CPI rates are expected to have declined, to +4.7% yoy and +2.5% yoy, from +4.9% and +2.6% respectively. At its latest meeting, the ECB decided to keep all three of its interest rates unchanged as was widely anticipated and announced that it will end the pandemic emergency purchase programme (PEPP) in March. However, they decided to extend the reinvestment horizon for the PEPP, and also to compensate by doubling the monthly pace of the asset purchase programme (APP) for the second quarter. In our view, the outcome, combined with President Lagarde’s view that they are “very unlikely” to start raising interest rates in 2022, suggests that the ECB remains very accommodative. So, a slowdown in inflation could confirm that there is no rush in lifting interest rates and may bring the euro under renewed selling interest.
EUR/USD — Technical Outlook
EUR/USD traded slightly lower yesterday, after it hit resistance at 1.1335, but today, it hit support slightly above 1.1275, and then, it rebounded somewhat. Overall, the rate stubbornly remains within the sideways range between the 1.1233 and 1.1375 barriers, but, in the bigger picture, it is also below the downside resistance line taken from the high of May 25th. Therefore, we see more chances for a downside exit out of the range, rather than an upside one.
If, indeed, the bears are strong enough to push the pair below the lower end of the range, which is at 1.1233, we may initially see them targeting the low of November 24th, at 1.1185. If they are not willing to stop there and manage to overcome that obstacle as well, this will confirm a forthcoming lower low on the weekly chart, and may pave the way towards the 1.1100 area, which provided support back on June 1st, 2020.
On the upside, we would like to see a decisive recovery above 1.1465, before we start examining the bullish case. The rate will already be above the aforementioned medium-term downside line, and the bulls could initially climb towards the 1.1524 zone, which supported the action back on October 12th and November 5th. If they don’t stop there, we may experience advances towards the 1.1575 barrier, or the 1.1615 zone, marked by the low of November 9th, and the high of November 4th, respectively.
AUD/CAD — Technical Outlook
AUD/CAD has been in a free fall mode since Wednesday, when it hit resistance at 0.9240. Yesterday, it broke below the upside support line taken from the low of December 3rd, and then, below Monday’s low, at 0.9155. In our view, those breaks have signaled a short-term bearish reversal.
At the time of writing, the rate is trading slightly above the low of December 14th, after the test of which the bears may allow a small bounce. However, we expect such a recovery to stay limited below 0.9155 and we see the case for a forthcoming slide back near 0.9095. The bears could overcome that obstacle this time around and perhaps dive towards the low of December 9th, at 0.9055, or the inside swing high of December 7th, at 0.9030.
On the upside, we would like to see a strong recovery back above 0.9250 before we adopt a positive stance again. The rate will be back above the aforementioned upside line and the bulls may get encouraged to climb towards the high of December 30th, at 0.9302. If they don’t stop there, we could see them challenging the 0.9320 level, marked by the high of November 2nd, or the peak of October 27th, at 0.9336.
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