Dollar rallies following stellar US employment report
08/Dec/2014 • Currency Updates•
The Dollar broke to fresh five-year highs on a trade-weighted basis last week on the back of a very strong job market report in the US. Up until Friday, major FX currencies had traded in a fairly tight range. On Thursday, the lack of ECB commitment to a specific time table for further easing measures enabled the Euro to recover the ground lost earlier in the week. Then on Friday the news that the US job market appears to be finally accelerating sent all major currencies lower against the Dollar. Sterling, however, deserves a special mention as it managed to keep the week losses to a minimum, while the Yen was once again G10’s worst-performing currency, breaking through the 120 level against the Dollar.
With few data releases last week and an expected unchanged policy decision from the Bank of England, focus was on the Treasury’s Autumn Statement and the BoE’s Inflation Attitudes survey. Neither contained significant surprises. The former revealed that fiscal policy would remain essentially unchanged. Fiscal tightening will continue to the rough extent of 1% of GDP a year for the foreseeable future, though the emphasis may shift from tax increases to spending cuts. As for inflation expectations, they are unsurprisingly coming down on the back of lower inflation out turns and lower energy prices, actual and expected. All in all, little of note last week out of the UK, while Sterling put in an impressive performance rising against every major currency save the US Dollar.
The European Central Bank last week disappointed our expectations for further monetary easing measures. While it did reaffirm its intention to expand the balance sheet back to its maximum level of 2012, and stated that the staff have “stepped up technical preparations” for further programs, no concrete details were offered. The general tone of the press conference was mixed. Projections for growth and inflation were slashed yet again, and Draghi warned that the inflation forecasts did not reflect the latest fall in oil prices.
Although the Euro attempted to stage a rally after the ECB press conference, it gave up all its gains and then some after the US payroll report on Friday highlighted the widening gap in economic performance across the Atlantic. The next milestone for the common currency comes Thursday when the European bank take up of the second TLTRO offer of ultra-cheap ECB funding is announced. Expectations are for a EUR150 billion take up – considerably more than in the first announcement, of only EUR82 billion.
Jobs, jobs, jobs in the US. The November payroll report showed acceleration in the pace of job creation. 321,000 net jobs were created, and there were upward revisions to the prior two months as well. The average workweek was up, and we had a notable 0.4% MoM increase in hourly wages. The total of labour income (including higher hours and higher pay) has now grown at an annualised pace of 6% over the last three months. Together with the positive effect of lower gas and energy prices, we think the stage is set for upward surprises in US consumption, more than compensating for any weakness in trade brought about by the strong Dollar. In summary, more of the same in the US: a strong economy, expectations for hikes beginning next spring, and new cycle highs for the greenback.