What a dramatic week that was for the US Dollar. It opened last Monday with its index against a basket of major currencies at 88.75, hit a best level of 89.25, but by Thursday evening was down at just 88.27; only a tiny fraction above its Davos low. In the first four days of the week, neither President Trump’s State of the Union Address, strong incoming economic data, or a somewhat more hawkish FOMC Statement could offer any support to the currency.
Having spent all week completely ignoring very strong incoming economic data and being totally unmoved by higher US bond yields, it was not until Friday that the USD finally snapped higher after the employment report showed that average earnings growth had risen to 2.9%; the highest since 2009. Non-farm payrolls were only around the average of the previous 12 months at 200,000 and the average workweek actually fell. But, with the bond market acutely sensitive to signs of inflationary pressure, the earnings number sent 10-year Treasuries up to 2.84%; a huge rise in yields of 38bp since the beginning of the month. The USD index against a basket of major currencies was already a couple of tenths higher on Friday morning in Europe, but after the employment report was published it jumped to a high of 89.00 before settling into the New York close around 88.90.
As well as a new Governor of the Federal Reserve Bank, there are plenty of his colleagues scheduled to speak later this week. Even arch-dove Kashkari on Friday noted that he saw inflationary signs in the labour data and it will be interesting to see if the speakers have soothing words for stock market investors or focus, instead, on the continued normalization of US monetary policy. This morning in the US, we’ll have the ISM services index which consensus estimates at 56.5 after 55.9 in December. Ahead of that, the USD index opens in North America at 88.85 with 10-year US bond yields at 2.85%.