Like the Federal Reserve's monetary policy announcement, the U.S. non-farm payrolls report failed to help the dollar. The jobs report wasn't terrible but on a day when USD/JPY was already weak, the data miss in NFP and non-manufacturing ISM gave bulls a stronger reason to bail. Job growth slowed in the month of July from 248K to 157K but the June data was revised upwards. The unemployment rate also declined and average hourly earnings grew at a faster pace. U.S. - China trade tensions have taken a significant toll on USD/JPY. Earlier this week, the U.S. government proposed $200B in fresh tariffs on Chinese goods and today, China responded with $60B in retaliatory tariffs. They also boosted the reserve requirement on foreign currency forwards from 0 to 20% in an attempt to curb Renminbi weakness and the Yen rose alongside the Yuan. The trade war is far from over and headline risk is limiting demand for USD/JPY and putting pressure on pairs like EUR/USD and GBP/USD.
For the first time in more than a month, EUR/USD closed below 1.16. The sell-off in the euro this week was mainly a function of U.S. dollar strength as Eurozone fundamentals took back seat to bigger stories. Data from the Eurozone was mostly weaker with stronger inflation offset by falling confidence, weakening growth and slower gains in retail sales. Germany's trade balance is the only important report on next week's calendar. Technically the pair is vulnerable to additional losses after having ended the week at a 1 month low. We expect EUR/USD to test 1.15 and we are watching EUR/JPY for a possible move down to 128.
Sterling extended its losses today on the back of weaker service sector activity and fresh comments from Bank of England Governor Carney. He said "one hike a year isn't a bad rule of thumb" and the "chance of a no deal Brexit is uncomfortably high." "Some scenarios may require a rate cut." Although the BoE raised interest rates by 25bp this month, all this talk of possible easing in a tightening cycle makes investors nervous so unless there's progress on Brexit negotiations or data takes a turn for the better, GBP/USD will fall to fresh 1 year lows. Second quarter GDP, trade balance and industrial production numbers are scheduled for release on Friday.
USD/CAD dropped to a fresh 6 week low on the back of stronger trade data. Canada's trade deficit shrank to 626 million, which is a significant improvement from the prior deficit of -2.77B. Despite the U.S.' tariffs on steel and aluminum, exports hit a record high thanks to robust demand for energy and aircraft sales. As aa result, the market is pricing in a 77% chance of a rate hike in December. USD/CAD has broken below 1.30 and we expect the pair to extend its losses in the coming weeks if data continues to surprise to the upside.
The Australian and New Zealand dollars also ticked higher on the back of the recovery in the Chinese Yuan. Next week we'll see if Yuan weakness has affected the views of the Reserve Banks of Australia and New Zealand. Both the RBA and RBNZ are expected to leave monetary policy unchanged but their outlooks could be vastly different. The RBNZ has many reasons to be cautious while the RBA could find cause for optimism. When Australia's central bank last met, they talked about progress in the labor market and pickup in inflation. Since then, data has improved. In New Zealand however, data has taken a turn for the worse. Both countries face serious risks from slower Chinese growth and it will be interesting to see how they address it because so far, the RBA has stayed away from the issue while the RBNZ has concerns.
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