Surprisingly Strong US Wage Growth Weighs on Australian Dollar

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Headlines

  • Australian and New Zealand Dollars Pushed Lower by Strong US Jobs Data – Rising odds of aggressive Fed tightening weigh on antipodean currencies
  • Euro Held Ground on Hopes of Imminent German Coalition Deal – Confidence in Eurozone economic health remains strong
  • UK Construction Sector Slowed to Near-Stagnation – Pound rally possible on positive services PMI
  • USD Exchange Rates Surged on Unexpectedly Strong Wage Growth – Case for March Fed interest rate hike improves

Australian Dollar

Even though the fourth quarter Australian producer price index picked up modestly on the year this was not enough to boost AUD exchange rates. While this does suggest that inflationary pressure within the domestic economy is building investors were more interested in the latest US jobs data. With the odds increasingly pointing towards a faster pace of monetary tightening from the Federal Reserve the appeal of the Australian Dollar remained limited.

An improvement from today’s services PMI may help to limit the downside potential of AUD exchange rates, although positive momentum is unlikely ahead of tomorrow’s Reserve Bank of Australia (RBA) decision.

Sterling

In another negative shock to the system January’s UK construction PMI dropped sharply, falling to just 50.2. As this places the construction sector dangerously close to contraction territory the mood towards the Pound naturally soured somewhat. The lingering sense of uncertainty regarding Brexit also dampened demand for Sterling, with markets still rather concerned by persistent divisions within the Conservative government and Theresa May’s weak position as Prime Minister.

However, as the service sector accounts for the vast majority of UK economic activity a strong showing from this evening’s services PMI could see GBP exchange rates returning to a general uptrend.

Euro

While the Eurozone producer price index for December proved weaker than forecast the Euro remained on a relatively strong footing on Friday. Although this suggests that inflationary pressure within the currency union is not picking up as European Central Bank (ECB) policymakers might like investors were not particularly discouraged. As hopes for an imminent coalition deal between Angela Merkel’s CDU and the SPD strengthened this helped to limit the downside exposure of EUR exchange rates.

As Eurozone retail sales are thought to have lost some momentum in December, though, the single currency may reverse its recent bullish trend tonight.

US Dollar

Demand for the US Dollar surged ahead of the weekend, buoyed by the better-than-expected details of the latest US jobs report. Continued tightening of the labour market was accompanied by a solid acceleration in wage growth, something which will likely please the Federal Reserve. As lacklustre wage growth has been a key factor in steadying the Fed’s hand this uptick fuelled bets that a March interest rate hike is now all but imminent.

Even if the ISM non-manufacturing composite index fails to pick up on the month this is not likely to be enough to materially dent USD exchange rates in the near term.

Canadian Dollar

As oil prices struggled to maintain an uptrend the appeal of the Canadian Dollar softened once again. Even so, the downside potential of CAD exchange rates appears limited at this juncture thanks to easing market worries over the future of NAFTA. While the Fed looks increasingly set to raise interest rates in March jitters over the prospect of a major policy divergence between the US central bank and the Bank of Canada (BOC) have still eased.

Nevertheless, CAD exchange rates remain vulnerable to the bearishness of the oil market.

New Zealand Dollar

Disappointingly, December’s New Zealand building permits data effectively reversed the growth seen in November as the measure contracted -9.6%. This gave investors little cause for optimism in the outlook of the wider New Zealand economy, even though the ANZ consumer confidence index showed a solid uptick on the month. The resurgence of the US Dollar and bullish US jobs report put further downside pressure on NZD exchange rates.

However, the ‘Kiwi’ may still find some support today if January’s ANZ commodity price index proves positive.

Data Released

February 5th 08:30 AUD Services PMI (JAN) 52.4
February 5th 10:00 NZD ANZ Commodity Price Index (JAN)
February 5th 19:30 GBP Services PMI (JAN) 54.0
February 5th 20:00 EUR Eurozone Retail Sales (YoY) (DEC) 1.8%
February 6th 01:00 USD ISM Non-Manufacturing Composite Index (JAN) 56

Post by TorFX

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