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Dollar rallies following strong jobs report and increasing trade tensions

By Alex Edwards

GBP/USD rallied through the 1.30 figure on Friday after European Union negotiator Michel Barnier said the EU was open to discussing other “backstops” on the Brexit issue. He also refused to make comments on whether he accepted or rejected the Chequers proposal.

1.30 didn’t hold for long, however, as US employment data printed better than expected. The data also showed that US job growth accelerated in August and wages notched up their biggest annual increase in more than nine years. As a result, the dollar rallied across the board on Friday.

Looking ahead today and it all starts with the release of Gross Domestic Product (GDP) data, which could highlight a few concerns. Last week the IHS/Markit Institute indicated that the British manufacturing industry had slowed to its lowest expansion rate since July 2016 – July 2016 was just after the Brexit referendum. Manufacturing Production is also due for release at the same time. On Tuesday we get the UK Jobless Rate which is expected to remain at 4%.

The US Dollar Index (DXY) appreciated 0.33% to start the new working week, opening this morning at 95.34. The catalyst for the move upwards was stronger than expected US wage growth, as well as fresh new threats from President Trump on Chinese imports. Market sentiment shifted t decidedly towards safe-haven currencies, seeing the greenback strengthen further. The main talking point domestically was the surprise reading from the US non-farm payrolls report which noted an increase of 2.9% for average hourly earnings. US wage growth across numerous readings has gradually drifted upwards, supporting the Fed’s assertion that the tight labour market would lead to higher wages and price inflation. The implications were not lost on the market, which saw US treasury yields move sharply higher as well as boosting expectations of the Fed tightening monetary policy further. The dollar also benefitted from the sentiment, rising higher on the news against most of its counterparts.

Demand for the greenback was also boosted by new threats from the President, despite not announcing the $200bn tariffs on Chinese imports. Trump did say that it could happen “very soon” but so far the tariffs have not yet been implemented. It was another ratchet up of the rhetoric that saw the USD appreciate further with his statement suggesting he was considering putting higher tariffs on all Chinese goods, leading to a negative sentiment on market movements. The news hit riskier assets the most and saw steep depreciations for a number of China aligned currencies.

To start the new week the Greenback looks to the headlines for direction with a quiet economic calendar to contend with.

EUR/USD moved within a 1.11% range last week from lows of 1.1530 on Wednesday and a high of 1.1659 on Thursday. The pair moved off its perch of 1.1649 on Friday and relinquished all gains made earlier in session following strong US employment data. The US Nonfarm Payroll report surprised markets adding 201,000 new jobs in August, beating expectations of 191,000. Also, average hourly earnings rose 0.4% month-on-month and by 2.9% year-on-year, which was the highest wage growth print in almost a decade.

In terms of local data, German industrial production was weaker than expected, falling by 1.1% in July, after declining 0.7% in June. The annual pace of growth in industrial production eased to an increase of 1.1% in July, down from a rise of 2.7% in June. Eurozone Q2 final GDP came in unchanged as expected at 0.4% but the year-on-year numbers were revised to 2.1% from 2.2%. Looking ahead, the macroeconomic calendar is full and kicks off with the Eurozone’s Sentix Investor Confidence. This survey of 2,800 analysts and investors has surprised to the upside in the past two months, reaching 14.7 points in August. A similar figure is likely for September.

The Australian dollar continued its freefall lower on Friday after opening the day hanging onto the 72 US cent handle. Whipsawing for the majority of last week between 0.7160 and 0.72, the AUD dropped through support levels during the domestic session on Friday as it continued to trade in a risk-off environment. The aussie closed the day on Friday at a new yearly low of US 71 cents following the news that President Donald Trump was looking to hit China with further tariffs on $US267 billion of Chinese goods, this on top of the already announced tariffs of US $200bn of goods.

With levels now testing Feb ’16 lows, it is possible the US 70 cent mark is now firmly on the horizon for investors as we head into the new week. Direction for the Australian dollar will be determined by the release of Chinese inflation figures this morning as the AUD/USD opens at 0.7110.

The Canadian dollar fell throughout the day on Friday touching one-week lows after employment data fell short of broader expectations. Surprisingly the economy lost in excess of 50,000 jobs throughout August, the largest monthly decline since January and well outside analyst expectations for labour market expansion. That said, an uptick in full time employment helped pacify investors and ensures another rate hike is still on the table.

Having fallen almost one percent through the week, the Canadian dollar remains vulnerable to trade talk and risk appetite trends. There is an increasing fear Trump and the US will look to implement tariffs on Canadian auto-makers, a move that could have significant consequences for the broader Canadian economy.

With little headline data on the domestic docket throughout the week ahead direction will continue to derived from ongoing trade developments.

The trade linked Kiwi was sold off on Friday to finish the US session as the second worst G10 performer. Stronger than expected US wage growth, in tandem with the news that President Trump was threatening to impose tariffs on all Chinese imports forced the NZD and it’s AUD counterpart lower. NZD/USD fell from 0.6585 to 0.6528, its lowest level since February 2016. Interestingly the NZD fared better than the AUD with the AUD/NZD cross losing half a cent, settling at levels near 1.0870.