The focus is likely to be on the Fed and the rate hike and inflation expectations today as the reasons for the only real threat for the job market growth come from the so-called Great Resignation. This inflation-induced eagerness to resign and find better employment opportunities has been the reason the businesses haven’t been able to employ as many people in December as they would have liked to. By reading further you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.
The data points to today’s NFP number coming in either in line with the expectations or somewhat higher. If the Great Resignation (employees leaving in order to get better deals) doesn’t spoil the December jobs growth seasonal factors together with a rapid economic recovery suggest that we should get a solid or perhaps even a better than expected jobs number. Even though the US services PMI came in below expectations (62 vs. 67 expected), the sector has continued on a growth track for the 19th month in a row and the employment index came in at 54.9% which is substantially above the critical 50% level (but down 1.6% from November). Initial jobless claims are well below the averages even before the pandemic, the services PMI keeps on indicating growth and the impact of Christmas is likely to give the NFP number a boost.
While a strong deviation from the expectations could create a spike in volatility it’s more likely that the markets are more focused on what the Fed officials are saying about the coming rate hikes. Federal Reserve board member Daly said yesterday that the labour market looks very strong and that inflation is too high. This indicates that she is likely to vote for rate hikes in the coming meetings. Feds Bullard suggests there could be a rate hike already in March and sees three hikes in 2022.
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USD Index (DXA) has been fluctuating sideways over the recent days. We said a couple of days ago that we might see a correction to the 95.70 – 95.90 range. This is exactly where the buyers came in after the correction happened. The green team took over at 95.89 and pushed the index again to 96.38 resistance. Strong ADP numbers and the fact that the weekly claims are staying below even the pre-pandemic averages don’t seem to excite the traders. This suggests that they really are not focusing that much on employment but on the Fed rate hikes, ie. how the central bank is likely to act when countering inflation. Higher daily low values suggest that the dollar bulls are optimistic and likely to push the index higher. A solid break above the 96.38 resistance would be likely to take DXA to 96.65 or so while a failure to challenge the level successfully would indicate a 0.60% move lower to a key support level at 95.56.
EURAUD has broken out of a bearish trend channel and rallied nicely higher. This currency pair is a real mover that can easily swing 200 pips in a relatively short period of time. Now the pair is trading above a key support level (at 1.5729) that coincides with the 50% retracement level – and has reacted higher from it. This is structurally an important level. This is why the market is bullish whilst trading above it. Above 1.5729, it’s probable that EURAUD moves to 1.5865 while a break below the level would indicate a move to the 1.5660 – 1.5690 range.
NZDUSD took a dive yesterday after the pair failed to maintain levels above the 0.6820 level. It was our view that a break below 67.64 might bring the recent swing low at 0.6702 into play again. The pair hasn’t quite reached the level yet and is now consolidating at trendline support but below the 61.8% Fibo-level that roughly coincides with the 0.6764 level (now resistance). With the pair being near to a support area, we should look for long trade opportunities. Provided the pair doesn’t violate yesterday’s low it looks likely that it will penetrate the 0.6764 and rally to the moving averages (currently at 0.6790 – 0.6798). Otherwise, the 0.6702 would be likely to be tested.
Macro Drivers for the USD As the most followed, invested and traded markets for risky assets are priced in the USD it is helpful to understand what macroeconomic factors impact the other side of the equation, the USD. Whether we are trading EURUSD, XAUUSD or US equity CFDs the factors impacting the dollar, the nominator in the equation, have a significant role in the formation of all medium to long-term price action. The following table summarises the most important fundamentals.
|The Federal Reserve||Fed has started tapering and expects it to end in the summer of 2022. The central bank was forced to change its views on inflation being transitional inflation traders expect the first hike in June 2022 (the probability of a hike is 80.9% at the time of writing this).|
|Stimulus||The US lawmakers have authorised approximately five trillion dollars of economic stimulus since the beginning of the pandemic. Now, US Congress has passed a $1.2 trillion infrastructure spending plan.|
|Yields||In Q3 and Q4 2021 the benchmark 10-year US Treasury yield ranged between 1.1720% and 1.6830%. The hottest inflation readings since 1982 have pushed the 10 yr. yield higher as bonds have been selling off.|
|Employment||Payrolls increased by 210K in November. This was a massive disappointment after the analyst consensus had predicted strong jobs growth of 553K.|
|Inflation||The annual headline inflation reading for November at 6.8% (6.2% previous) is the highest CPI print in almost 40 years. The core CPI (all items less food and energy) moved to 4.9 per cent y/y (4.6% previous) This was in line with market expectations and was the biggest annual increase in core consumer prices since June 1991.|
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The Next Main Risk Events
- CAD – Employment Change
- CAD – Employment Rate
- USD – Average Hourly Earnings m/m
- USD – Non-Farm Employment Change
- USD – Unemployment Rate
- USD – Treasury Currency Report
For more information and details see the TIOmarkets economic calendar here.
Market News & Facts
- ADP Employment Change 807K (405K expected)
- US unemployment claims 207 (199k expected)
- Bitcoin lower on Khazakstan upheaval
- US inventories weigh on oil
- US ISM Manufacturing PMI 58.7 (60.0 expected)
- US JOLTS Job Openings 10.56M (11.06 expected)
- OPEC not expected to deviate from earlier output plans
- Biden: US to act decisively if Russia attacks Ukraine
- Trading in Evergrande shares halted in Hong Kong
- US Durable Goods Orders m/m 2.5% (1.9% expected)
- US Core PCE inflation 0.5% (0.4% expected)
- US Final GDP 2.3% (2.1% expected)
- US CB Consumer Confidence 115.8 (111.1)
- Canadian Retail Sales m/m 1.6% (1.0% expected)
- Canadian Core Retail Sales m/m 1.3% (1.6% expected)
Chief Market Analyst
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