USD remains on stronger footing after NFP report

USD: Impact of strong NFP report dampened by Fed comments

The US dollar has continued  trade at stronger levels during the Asian trading session following the release of the stronger than expected non-farm payrolls report on Friday. It has helped to lift USD/JPY back above the 140.00-level. The US dollar has regained upward momentum after the non-farm employment report revealed that the US economy added a further 339k jobs in May, and there were also upward revisions to the prior two months totalling 93k. It was another significant upside surprise for employment growth which is averaging 314k jobs/month so far this year. Employment growth appears to have stabilized so far this year after slowing during most of last year. With employment growth still strong it will keep pressure on the Fed to keep raising rates as it raises doubts over whether the current monetary policy stance is sufficiently restrictive to bring inflation back to target. It is now a close call as to whether the Fed will deliver another rate hike this month or wait until the next meeting in July. On balance we still believe that the Fed is more likely to skip the June meeting as signalled by Fed Governor Jefferson last week who has been nominated to be vice chair.

Those comments have helped to dampen the upward impact on US yields and the US dollar from the stronger non-farm payrolls report.  The US rate market is still reluctant to more fully price in another hike in June with around 8bps of hikes currently priced in whereas a July hike is more fully priced with around 21bps of hikes currently priced in. Fed officials have now entered the blackout period ahead of the 14^th June FOMC meeting so if they want to shift market expectations in favour of a June hike it is likely to be signaled indirectly through another avenue such as report in the WSJ.

The one silver lining for the Fed from the non-farm payrolls report was that the household survey was not as strong. It revealed that the unemployment rate jumped by 0.3ppt to 3.7% driven by the largest monthly increase in unemployment since the COVID recession in March and April of 2020 and a smaller increase in the labour force. The figures have been volatile recently and there is not yet a clear upward trend. More reassuring for the Fed was another month of slower average hourly earnings growth. So far this year AHE have increased on average by 0.3%M/M in comparison to an average of 0.4%M/M during last year. It provides further evidence that the tightening labour market is not feeding through to stronger wage growth at the start of this year, and helps to give the Fed more leeway to slow the pace of hikes going forward.                            

US EMPLOYMENT GROWTH REMAINS STRONG

Source: Bloomberg, Macrobond & MUFG GMR

CAD: OPEC+ announcement provides mild boost ahead of BoC policy update

The other main development at the start of this week for financial markets to digest is fallout from the latest OPEC+ meeting that took place on 3^rd and 4^th June. The decision by OPEC+ members to take further action to cut production has helped to provide more support to the price of oil. It has lifted the price of Brent to an intra-day high of USD78.73/barrel overnight as it has moved further above the low from the end of last month at USD71.39/barrel. Our commodity analysts (click here) have highlighted that Saudi Arabia will make an unilateral (extendable) voluntary cut of 1 million barrels/day starting in July for one month. In addition, the existing voluntary cuts from the 9 OPEC+ countries have been extended by one year until December 2024. In 2024 the output baselines will be reallocated  from countries struggling to reach their targets to those with adequate spare capacity to do so. Our commodity analysts view these developments as only mildly bullish for the price of oil, and see room for further production cuts in the second half of this year if the price remains below USD75/barrel. As a result, we are not expecting a significant impact on the performance of oil-related currencies in the near-term. As we highlighted in our latest FX Weekly report (click here), the lower price of oil over the past month has not prevented the CAD from staging a rebound.

The CAD has benefitted recently from the stronger than expected economic data flow from Canada both for activity and inflation. Canada’s economy bounced back by more strongly than expected at the start of this year (+3.1%) in Q1 after contracting marginally at the end of last year (-0.1%). It came in stronger than the BoC’s updated forecast for growth (+2.3% in Q1) that had already been revised higher (+1.8ppts) in the April Monetary Policy Report. The BoC is still expecting the economy to expand weakly this year (+1.4% in 2023) resulting in excess supply opening up in 2H 2023 that will help bring down inflation. However, headline and core inflation measures have picked up in recent months contributing to more concern over the risk of persistently higher inflation. The recent combination of stronger activity and inflation data has fuelled speculation that the BoC could deliver a hawkish policy update on Wednesday. The BoC paused their rate hike cycle back in January. One potential upside risk for the CAD in the week ahead would be if the BoC signals that it is giving more serious thought to resuming rate hikes at upcoming policy meetings.                           

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
EC	09:00	Services PMI	May	55.9	56.2	!!
UK	09:30	Services PMI	May	55.1	55.9	!!!
EC	09:30	Sentix Investor Confidence	Jun	-15.2	-13.1	!
EC	10:00	PPI (YoY)	Apr	5.9%	5.9%	!
US	14:45	Services PMI	May	55.1	53.6	!!!
US	15:00	CB Employment Trends Index	May	116.31	116.18	!
US	15:00	Durables Excluding Defense (MoM)	Apr	--	-0.6%	!
US	15:00	ISM Non-Manufacturing Business Activity	May	54.5	52.0	!

Source: Bloomberg