Dollar Looking For Economic Guidance Ahead Of Busy Week

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Includes: DEUR, DRR, ERO, EUFX, EUO, FXC, FXE, UDN, UEUR, ULE, URR, USDU, UUP
by: Alfonso Esparza

The US dollar is higher against most major pairs on Friday ahead of the G20 meeting. The greenback fell across the board on Wednesday after the market took the comments from Fed Chair Powell on interest rates to mean less rate hikes from the central bank. The minutes from the November Federal Open Market Committee (FOMC) showed all members are onboard with more rates hikes coming "very soon", but the dovish narrative was in full force and the dollar only partially recovered to end up slightly higher against major pairs on a weekly basis.

  • Bank of Canada to hold rates at 1.75%.
  • OPEC/Russia meeting to guide energy market.
  • US economy to add 200,000 jobs in November.

Dollar Higher on Risk Aversion

The EUR/USD fell 0.67 percent on Friday as risk aversion ahead of the weekend favoured the US dollar. The single currency is trading at 1.1316, awaiting the outcome of the G20 meeting in Argentina. Previous meetings of global leaders have ended in stalemates and clearly show not everybody is on the same page. There have been signs of both China and the United States willing to cooperate and reduce tariffs, but they have come with an equal measure of escalation of trade disputes. Uncertainty is high as a week full of economic indicator rebased and geopolitical risks will end on Friday with the release of the US non-farm payrolls (NFP).

The US Federal Reserve has hiked 3 times in 2018 and the market estimates another interest rate lift on December 19. The CME FedWatch tool shows a 82.7 percent probability of a rate hike despite the comments from Fed members. The US central bank is expected to slow down its monetary policy tightening in 2019, but will finish the year with a 25 basis point lift after every major FOMC.

The US economic calendar will kick off on Monday, December 3 with the release of the ISM Manufacturing PMI forecasted to slow down slightly to 57.5. Non-Manufacturing PMI will follow on Wednesday along with the release of the ADP private payrolls report. Friday, December 7 the U.S. non-farm payrolls (NFP) will be posted with another big jobs gain expected, and a 0.3 percent average hourly earnings gain.

Loonie Falls Despite USMCA Signing

The Canadian dollar is lower on Friday against the US dollar. The USD/CAD gained 0.08 percent on Friday to put the loonie down 0.47 percent versus the greenback on the last week of November. Lower oil prices and a perceived slowdown of the economy could mean the Bank of Canada (BoC) remains data dependent and pushes back plans to raise interest rates until spring, although there is still a 70 percent probability priced in for a January rate hike.

Canadian dollar weekly graph November 26, 2018

Canadian Prime Minister was joined by US President Donald Trump and outgoing Mexican President Pena Nieto to sign the USMCA with the G20 as the background. Trade is a big topic for discussion at the meeting, with a likely outcome of no deal reached between China and the United States. Canada is not immune to trade uncertainty despite renewing its partnership with the US and Mexico.

Oil prices fell on Friday and the market will focus on the outcome of the meeting between the OPEC and other major producers to once again agree on a crude production cut to stem the drop in energy prices.

November Blues for Oil as Oversupply is Balanced Against Production Cut Plans

Oil prices have plummeted more than 20 percent during November. Weather and geopolitical factors have disrupted supply, but as supply has recovered and in the case of Iran, waivers were issued, oversupply concerns took over pushing prices lower.

Russia has not committed to a new agreement to limit production. The deal with OPEC and other major producers stabilized prices, but as the US President pressures Saudi Arabia to keep prices low, it must look to its own best interests.

Trade disputes have also impacted energy prices as global growth estimates have been slashed as more protectionist measures are introduced. Higher supply with shrinking demand have resulted in lower crude prices, with the OPEC trying to tackle the first part of the equation. The second production cut agreement is not a done deal at this point and comments from Russia do not hint at a strong commitment at this stage.

Gold Lower as Dollar Riding Risk Aversion Wave

The yellow metal ended November flat as risk events kept the commodity bid, while trade concerns and monetary policy boosted the US dollar. Gold has rejoined investors' portfolios as a safe haven, but still struggles to overcome its weakness against the US dollar as US triggered trade aversion has made the greenback the de facto refuge.

The US Federal Reserve is likely to hike in December with economic indicators validating the decision as US jobs and inflation continue to advance. Next year is a bigger question mark as the Fed will not be able to hike four times as in 2018 and the economy is expected to cool down. Gold is forecasted to trade higher next year as risk will remain, but the dollar will lose the support from the central bank.

Market events to watch this week:

Monday, December 3

4:30 am GBP Manufacturing PMI
10:00 am USD ISM Manufacturing PMI
10:30 pm AUD Cash Rate
10:30 pm AUD RBA Rate Statement

Tuesday, December 4

4:15 am GBP BOE Gov Carney Speaks
7:30 pm AUD GDP q/q

Wednesday, December 5

4:30 am GBP Services PMI
8:15 am USD ADP Non-Farm Employment Change
10:00 am CAD BOC Rate Statement
10:00 am USD ISM Non-Manufacturing PMI
7:30 pm AUD Retail Sales m/m

Thursday, December 6

All Day All OPEC Meetings
8:30 am CAD Trade Balance

Friday, December 7

8:30 am CAD Employment Change
8:30 am USD Average Hourly Earnings m/m
8:30 am USD Non-Farm Employment Change

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar