By Dean Popplewell
Fed Chair Janet Yellen reported, said very little new, blamed ongoing slack in US employment, put the emphasis back on the data "dots" with one of her comments of +1% rates at the end 2015. It's not necessarily new information, but the market saw as somewhat meaningful the fact that she has explicitly stated a time. The Fed chair was initially viewed as "dovish" but the market then noted some small changes in language. The new message makes it clear that if NFP is maintained at +230k it could force their hand - hence, the timeline. At this pace, within nine-months US unemployment will be at +5.3-5.5%. The labor market strength will be the influencer and all this market requires is "rate divergence" for volatility.
If nothing else, yesterday's testimony caused the various asset classes to move - immediate reaction had equities on the back foot; bond yields backing up, higher yields supporting the dollar, and gold trading under pressure from "no" inflation. It's quite a mouthful to chew, but certainly brought some much needed pockets of volatility that the forex market so dearly misses.
UK labor red-hot
On Governor Carney's watch the UK has produced another set of strong labor results with the UK claimant count measure down -36k in June. That makes the unemployment rate for March to May at +6.5% for forward guide historians and the lowest in six-years. What supports a strong report is the fact that the majority of job growth is full-time, however, what's probably going to make Carney's job a tad easier, from a earlier rate hike perspective, is the slack in wage growth (UK is not the only G10 economy with the same problem, in fact it seems endemic amongst the developed economies despite all that money sloshing about). UK wage growth is up only +0.7%, y/y. The bulk of growth is coming from the total number of hours worked (+1.4% March-June vs. Dec.-Feb.). Now it's up to the fixed income dealers to battle it out on when they think the BoE will begin to tighten. Is a strengthening UK labor market strong enough to convince Carney and company to start tightening as early as this November 2014? It's an early favorite amongst a few and reasons enough for the market to want to own GBP on dips outright (support £1.7075) and why EUR/GBP is looking to tackle €0.7900 for the first time in nearly two-years.
EUR trade to the East declines
The euro May trade surplus with the rest of the world has increased year-over-year (+€15.4b vs. +€14.3b or exports +0.6% while imports are at +0.5%). Nevertheless, and not so well, is that euro trade with Russia continues to decline significantly following the Ukraine crisis. The pickup in exports is very positive news for the eurozone economy, especially since EU policy makers are relying heavily to trade themselves out of their mess. Internally, with high unemployment, low wage growth, and the heavy-handed policy of austerity measures, businesses require foreign trade to break the cycle. The problem for many of the eurozone members is that they are relying heavily on trade deals with Russia, and since the Crimea crisis the dynamics have changed and not necessarily wholly filtered through to many of the peripheries.
For January to April, Russia exports are down -13%, y/y. However, Ukraine/Crimea is not the sole factor, the decline has certainly appeared before Euro-Russian tension and well before meaningfully placed global sanctions on Russia. Looking from Russia's perspective, the decline can be heavily attributed to the sharp slowdown of the Russian economy since last year. Nonetheless, it was Germany who warned only last week that its economic growth rate slowed in Q2 because of the Ukraine-Russia conflict and the eurozone cannot afford for Germany to back pedal - it's their work horse. For the ECB, they have been relying on modest euro growth this year and the reality is, that despite the worst of the euro crisis supposedly over, Q1 saw a marked slowdown from Q4 2013 and hopes for a significant rebound in Q2 are fast fading. Where is the ECB now?
The 18-member single unit has remained locked with its two big-figure range that it has held since mid-May (€1.3700-1.35). The key outright support for the pair still remains the €1.3503 post ECB low in June and the €1.3477 January low. Any move below those levels is very much expected to ignite some significant downside momentum for both the fundamentalists and technicalist.
China fails to deliver
Overnight trading saw China's Q2 GDP and June industrial production topping expectations (+7.5% and +9.2% respectively). However, with investors appearing less inclined to anticipate a more aggressive round of stimulus beyond the current "targeted measures" their appetite for risk has certainly been dented. Investors have been leaning specifically on the kiwi (NZD$0.8700), aussie (AUD$0.9348), SP500 futures, and Chinese equities, causing them all to fall modestly post-data. Global risk is certainly unnerved and rather precarious after such a long healthy run. More and more investors continue to seek conviction.
BoC-more of a "dove"?
Loonie bulls have been side swiped ever since Canada's dismal jobs report last week. Will it be deja vu after the BoC rate announcement this morning? They are expected to keep rates on hold at +1%. But, with activity data on the weaker side and no sign of inflation expectations on the rise, Governor Poloz bias is expected to be on the dovish side. But how strong will rhetoric be? What's needed to push the loonie lower and through the psychological $1.0850 with conviction? With CAD short positions much lighter after last Friday's clean out should have cleared the way for a significant threat higher for USD/CAD with a "dovish" stance. The first line of defense remains at $1.0795-00 - the market will continue to favor picking up USD on pullbacks.