Modest USD weakness as NFP signals for Fed pause mixed

USD: NFP report provides more evidence of slowing employment growth

The US dollar has rebounded but continues to trade at softer levels overnight after the recent rebound suffered a setback on Friday triggered by the release of the weaker than expected non-farm payrolls report for July. It has resulted in the dollar index falling back towards the 102.00-level after hitting an intra-day high last week at 102.84 which brought it roughly back in line with the year to date average of 102.74. The correction lower for the US dollar was triggered by more evidence of slowing employment growth in the US. The non-farm payrolls report revealed that the US economy added 187k jobs in July following a downwardly revised increase in employment of 185k in June.  It has brought down the average monthly increase in employment over the last six months to around 220k compared to around 350k in the last six months of last year. While employment growth remains solid, there has clearly been a more marked slowdown in the pace of employment growth so far his year. It is the first of two NFP reports that the Fed will have seen before the next FOMC meeting on 20^th September. The weaker July NFP report has reinforced market expectations that the Fed will leave rates on hold in September. The US rate market is currently pricing in only around 4bps of hikes by the September FOMC meeting. It also helped to bring down rates at the long-end of the US curve after they threatened to break higher for most of last week. The 10-year US Treasury yield fell sharply by around 17bps from the intra-day high on Friday to the close which it brought it back closer to 4.00%. Still, the modest US dollar rebound and higher yields today suggests investors see some positives from the jobs data and Fed rhetoric this week will be important.  

Market attention will now also shift to the release of the latest US CPI report for July in the week ahead (Thurs). The last three US CPI reports for April, May and June have shown a clear slowdown in core inflation. The so-called super core measure (core services less housing) has increased by an average of just 0.12%M/M over the last three months and was even flat in June. If the much slower pace of core inflation is repeated again in the July CPI report then it will further reinforce expectations that the Fed can end their hiking cycle. Then if inflation continues to slow back towards target through the rest of this year, it will create room for the Fed to begin lowering rates next year. Last month’s price action highlights that the US dollar would be vulnerable to another sell-off if the US CPI report is weak on Thursday. The dollar index declined by almost 3.5% following the release of the weaker NFP report for June on 7^th July which was quickly followed up by the weaker US CPI report for June on 12^th July. Nevertheless, the non-farm report for July also provided some less reassuring news for the Fed as it showed that average hourly earnings growth increased at a faster rate of 0.4%M/M in for the second consecutive month. The Fed is unlikely to be overly concerned at this stage given other measures of wage growth such as the ECI have been more favourable for Q2. Please see our latest FX Weekly for more details (click here)         

AVERAGE HOURLY EARNINGS UNCHANGED BUT AT  HIGHER LEVELS

Source: Bloomberg, Macrobond & MUFG GMR

CAD: Weaker jobs data mixed with stronger wage growth

The US dollar has rebounded from the weakest levels recorded after the NFP data on Friday with investors assessing the jobs data and seeing enough in the data to suggest the US economy remains resilient. Yields in the US have drifted higher today from the lows recorded on Friday. This move has helped reinforce support for USD/CAD after the data from Canada on Friday was weaker than expected. Employment fell by 6.4k in contrast to an expected 25k gain. However, there were two caveats that likely mean the market will not read too much into the labour market weakness. Firstly, the drop in employment in July followed a strong 59.9k gain in June while more importantly, the annual hourly wage growth accelerated from 3.9% to 5.0%, indicating the June reading was an outlier on the weak side.

But the data was still compelling enough evidence to suggest the Bank of Canada’s tightening to date is having the desired impact on slowing the economy. The interest rate sensitive construction sector recorded job losses for the fourth month in the last six underlining the BoC tightening impact. That suggests to us that the BoC is done tightening which remains what is implied by the pricing in the OIS market. Central bank policy expectations between Canada and the US are quite similar although the market remains more convinced on the need for rate cuts in the US. That bias will likely limit the scope of the move higher in USD/CAD from here and direction will remain more determined by events in the US. The upside momentum in crude oil prices will also help limit the move higher in USD/CAD at the margin. The 2-year US-CA yield spread is broadly consistent with the current spot rate based on five years of data.

CAD sentiment amongst speculative market participants has certainly improved. The latest IMM data showed further CAD buying by Leveraged Funds as short CAD positions were reduced further in the week to 1^st August. The short CAD position amongst Leveraged Funds is at its smallest since December 2022.

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
CH	09:00	FX Reserves (USD)	Jul	3.200T	3.193T	!
EC	09:30	Sentix Investor Confidence	Aug	-23.4	-22.5	!
US	13:15	FOMC Member Harker Speaks	--	--	--	!!
US	13:30	FOMC Member Bowman Speaks	--	--	--	!!
US	16:30	3-Month Bill Auction	--	--	5.280%	!
US	16:30	6-Month Bill Auction	--	--	5.270%	!
UK	17:00	BoE MPC Member Pill Speaks	--	--	--	!!!
US	20:00	Consumer Credit	Jun	13.00B	7.24B	!

Source: Bloomberg