EUR/CAD and post payrolls comment, EUR/CAD s/l raised
Fri 6/2/2017 9:28 AM
Real Time AmpGFX – EUR/CAD and post payrolls comment, EUR/CAD s/l raised
I bought EUR/CAD on Thursday after the oil price started to fall late in the US day following the initial rally on US inventory data. A Russian oil minister said that Russia could live with $40 and Trump was about to announce a pull-out from the Paris Climate accord. Oil prices appear more challenged now we are beyond the latest OPEC/Russia agreement and rising USA production. Trump’s policies appear to encourage more fossil energy production.
The Canadain economy has strengthened this year, but the housing market may be facing significant headwinds, similar to Australia, this could begin to weigh on Canadian confidence going forward.
I mentioned in our earlier long EUR commentary that the ECB may shift to remove its downside bias in its balance of risks next week. EUR may continue to see support from equity inflow and improving political stability against weakening stability in the US.
Trump is facing more widespread business criticism for pulling out of the Paris agreement and Comey testifies next week. Politics south of the border is also looking more unstable in Venezuela and Brazil, and this may affect confidence in the region.
USA yields have fallen quite sharply after the payrolls report, down 5bp, which may in part reflect the political uncertainty and weaker oil prices. This is weighing on the USD. Gains so far have been broad-based, but may become more durable in safer low yielding currencies.
Nevertheless, NZD and AUD have become more highly correlated with US long-term yields this year, in part because it speaks to the cost of funding in these countries and the heavily indebted households.
US labor data is most notable for indicators showing that it has tightened significantly over recent months, which makes the fall in US yields somewhat surprising.
The unemployment rate was expected to remain steady at 4.4%, but it fell further to 4.3% in May. It is down four months it a row from 4.8% in Jan. And the same pattern is apparent in the other broader measures of unemployment. The broadest (including discouraged, marginally attached and part-time for economic reasons; U-6) has dropped a full percentage point over four months from 9.4% to 8.4% (down from 8.6% in April).
The 4.3% unemployment rate is well below the average of the two cycles that preceded the 2008 GFC (from 1995 to 2007) of 5.0%, and below the previous cyclical low in 2006/07 of 4.4%, below the current Fed estimate of NAIRU (4.8%)
U-6 (8.4%) is now also below the average of the 1995-2007 of 8.7%. So even broader measures of unemployment might now be considered fully employed. A Fed hike in two weeks must be seen as pretty much a done deal. The Fed should continue to stick with its current forecasts for a third hike later and balance sheet unwinding later this year. There are political risks, but the Fed is unlikely to over-play these in their June statements or upcoming speeches.
The wages data were a bit weaker than expected, via a tick downward revision to the April data. Annual wage growth has slowed from a peak in December 2016 of 2.9% y/y to 2.5%y/y in May, below 2.6% expected.
Low wages growth is a global phenomenon, and many are wondering if they will be responsive to a tightening labour market, and perhaps the labour market could tighten significantly further without additional wage growth. Nevertheless, the labor market is now tight from an historical perspective, and the Fed must be vigilant of wages growth suddenly coming back. The wages data is growing in significance.
The ADP/NFP divergence widened in this report. The six-month average of ADP is 233K, and for NFP is 161K, the widest divergence since 2011. ADP has been a relatively poor indicator for NFP in recent months. NFP growth appears to be slowing, with the six-month avg payrolls around a low since 2011. This may be considered normal in light of the rapid tightening in the labor market and appears to be more an issue of reaching limits in supply. As such, it is hard to view the labor data as weakening and a reason for lower yields in the USA.
As such, we need to be cautious about buying into a weaker USD trend.
Positions
Long half unit EUR/CAD at 1.5156; s/l 1.5143 (raised from 1.5073)
Short half unit AUD/USD at 0.7455; s/l 0.7533; 0.7183