Written by Blockbuster jobs report fuels the greenback
The US dollar finished Wednesday higher against most of its major counterparts on Wednesday, staying on the back foot against the yen, the aussie and the kiwi.
The greenback received a shot in the arm after the rescheduled US jobs report for January revealed that nonfarm payrolls jumped by 130k from a downwardly revised 48k in December, nearly double the forecast of a 70k increase. What’s more, the unemployment rate ticked down to 4.3% from 4.4%, while average hourly earnings came in at 3.7%, a tad stronger than the expected 3.6%.
The blockbuster report confirmed Fed Chair Powell’s view that the downside risks to the labor market are diminishing and allowed market participants to scale back their rate cut bets. From around 60bps worth of Fed rate cuts this year, investors are now penciling in around 53bps.
The greenback strengthened on the back of the release, while Treasury yields rebounded. However, today, both the dollar and yields are pulling back, perhaps as the implied rate path still suggests that the Fed will likely be the most dovish major central bank this year, even after the upward adjustment, as US President Trump will most probably continue pushing for cheaper borrowing costs.
The next test for dollar traders now may be Friday’s CPI data for January, where an upside surprise could further boost the dollar if traders start questioning whether two quarter-point reductions are actually needed by the Fed this year.
Japan’s currency diplomat adds more fuel to yen’s engines
The yen extended its rally, and what is interesting this time is that the Japanese currency gained even with the dollar receiving fuel from the US NFP report. With the elections behind them, yen traders may be reluctant to resume their short positions, even if Takaichi’s landslide factory will make it much easier for her to proceed with her fiscal spending plans.
It seems that the rate-checks by Japanese and US authorities, as well as the new intervention warnings just after the election are leaving their marks on dollar/yen. During the Asian session today, top currency diplomat Mimura refrained from commenting on whether they have already intervened, but he noted that they are closely monitoring the FX market for excessive volatility, adding that they remain in close contact with the US over a jointly coordinated intervention.
The Australian dollar continued flexing its muscles, further steepening its uptrend against the US dollar, after RBA Deputy Governor Andrew Hauser said that inflation remains high and that interest rates are not restrictive enough to cool it down, even after the RBA last week hiked by 25bps. The probability for a back-to-back rate hike at the upcoming decision is now hovering at around 20%.
Wall Street uptrends struggle, gold edges slightly higher
On Wall Street, all three of the major indices finished their session slightly lower. Although the jobs report allowed for a temporary celebration, on signs that the economy is faring better than expected, the pushback of rate cut expectations may have been the reason for the subsequent slide.
Yes, the prevailing uptrends remain intact, but if investors take more basis points worth of rate cuts off the table tomorrow after the CPI data, the risk of a deeper correction in the not-too-distant future could increase, especially with market participants becoming more concerned lately about the massive amounts of money tech-giants need to finance their AI projects.
Gold edged slightly higher even as the dollar gained as well. Despite the recent sell-off in precious metals, the fundamental drivers of gold's prevailing uptrend remain in play. The Fed is still considered the most dovish major central bank, geopolitics are always on investors’ watch, while central banks, and especially the People's Bank of China, continue to pile up gold reserves.
by XM.com
