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Non-Farm Payrolls for July Miss Expectations, But Previous Months Revised Higher

By OFX

The US dollar managed to sustain substantial gains against its major counterparts yesterday on the back of continued risk aversion. As expected overnight the US Federal Reserve left interest rates unchanged. The central bank's policymaking Federal Open Market Committee voted unanimously to keep the target range for its benchmark rate at 1.75 percent to 2 percent. However, the committee is widely expected to approve an increase at the September meeting.

Attention will now turn to the Non-Farm Payroll Report, payrolls expected at 248K and the official release saw employment miss the mark and print at 157K. The Unemployment rate for the US remains at 3.9%. The reason for the unemployment rate remains at 3.9% is that previous month revisions were adjusted higher. In June NFP revised higher to 248K from 213K and May revised higher also to 268K from 244K. The correction of earlier months helps with market participants projections on eying another Fed hike in September with a slightly dovish tone.

From a technical perspective, On the back of a hawkish Federal Reserve, the Euro was one of the hardest hit yesterday falling below 1.1600 level. The EUR/USD pair is currently trading at 1.1583. We continue to expect support to hold on moves approaching 1.1570 while now any upward push will likely meet resistance around 1.1660. USD/JPY pair fell to a 24 hour low of 111.31. USD/JPY is currently trading at 111.62. Today the Bank of Japan will release the Minutes of its latest meeting followed by the release of the July Markit Services PMI expected at 51.6 from the previous 51.4.

The Canadian dollar moved marginally lower through trade on Thursday following its G10 comrades lower against the Greenback as trade tension dampened risk sentiment and forced investors toward traditional haven assets. Touching intraday lows at 0.7669 the loonie met selling pressure as investors watch trade hostilities between the US and China worsen and feared this might spill over into protracted NAFTA negotiations.

The CAD has been trading in a tight range against the greenback through the last week. The oil-driven unit found support overnight following a rebound in oil prices. With WTI crude trading at 68.96 bouncing off 66.89.

This morning we had an excellent release for Canadian Trade Balance numbers with imports and exports almost a net-net. Imports posted a 51.32B while exports printed a 50.7B, giving a Trade balance figure of -0.63B vs. expectations of -2.30B. Canadian Exports exceeded expectations by 1.99B if this trend continues over time the loonie will be well supported.

The Euro moved lower through trade on Thursday losing almost 100 points to fall back below 1.16 and touch intraday lows a 1.1583. Trade tensions between the US and China escalated again after the Trump administration confirmed it would look to raise the 10% proposed tariff to 25% across $200bn worth of Chinese Exports. Much to the Ire of President Trump, this drove the USD higher against most G10 counterparts. With trade hostilities appearing to worsen amplifying the threat to global growth the demand for emerging market currencies is shrinking forcing investors into the safe-haven JPY, USD, and CHF and putting a cap on any significant Euro advance through the short term.

Having broken short-term trend line support, the Euro now appears vulnerable and may test a break below 1.1575 as attentions turn to Fridays Non-farm payroll print for broader direction and affirmation the Fed and FOMC are on track to raise rates in September and December.

While short-term direction appears bearish, the medium and longer-term outlook may be shifting Euro positive. The Long Run Business Cycle in the US is running out of steam, and we are unlikely to see the same sustained level of growth through the 3rd and 4th quarters. Couple this with evidence the markets have mostly priced in the upside benefits of tighter US monetary policy and there is scope to suggest the euro will push back through 1.18 and 1.20 before years end.

The Great British Pound fell in overnight trading despite a much-anticipated cash rate hike. Opening this morning at 1.3017 against the Greenback, the Cable fell almost immediately after Governor Carney’s dovish statement. Governor Carney outlined that further rate hikes will be limited and gradual, adding that policy “needs to walk, not run, to stand still.”

The Sterling struggled to find its feet for much of the session as the market attempted to navigate its way through a busy day. Initially, the response was moderately positive as the market interpreted the Bank of England’s unanimous decision to hike as hawkish. While the rate hike itself was widely expected, a unanimous decision by all nine rate-setters was not. The positive sentiment quickly turned however as the Banks forecast is contingent on market pricing prevailing before the Statement. The implication is of only one rate hike per year for the next three years to leave the inflation only marginally above its target. Carney also noted many risks including a no-deal Brexit and mentioned that the Bank of England was preparing for all possible scenarios. The overall dovish statement started a route for the Sterling which was helped along by news abroad. The USD strengthened considerably as trade tensions again stole the Spotlight.

White House officials confirmed that Trump had increased the proposed tariffs on $200b worth of Chinese imports from 10% to 25%. China’s Ministry of Commerce responded quickly stating “China is fully prepared and will have to retaliate to defend the nation’s dignity and the interests of the people, defend free trade and multilateral system, and defend the common interests of all countries.” Markets were quick to respond globally as risk-sentiment decidedly shifted with the Pound depreciating further. All in all, the Sterling limped across the close as one of the weakest of the majors, down 0.8% against the USD and 0.4% against the Euro.

The Australian Dollar resumed its down trend overnight after trade wars escalated between the United States and China. Opening the morning above support levels at US 74 cents, it was a gradual move lower during the domestic session despite a large increase in trade surplus figures in Australia for the month of June.

Despite the large surplus of $1.87bn, both imports declined to -1% and exports contracted from 4% to 3%. The export surplus was mainly fueled by a boost in the energy sector with LNG shipments rising by 14%. Support at 0.74 was taken out quickly as investors digested the news and an exodus in risk appetite overnight saw the AUD/USD dip to 0.7360 in overnight movements.

President Donald Trump once again released further news of a potential increase in tariffs on $200bn worth of Chinese imports to 25% from the previously announced 10% in the previous month. Markets saw a surge in the US Dollar against a basket of currencies and with no sign of calm on either side by both China and the United States there is the potential to see further volatility over the coming weeks for the Australian Dollar and could look at a retest of yearly lows of 0.7310 in July. Retail sales are released this morning where it is expected to see a small rise to 0.3% for the month of June and contract from the previous months reading of 0.4%.

The New Zealand Dollar opens lower this morning vs. the Greenback as investors moved away from the Kiwi and risk aversion was back in full swing. The NZD/USD pair dropped from a high of 0.6798, through support levels of 0.6760 down to 0.6736. The move was triggered by trade concerns firmly back to the center of the markets radar with White House officials confirming that President Trump has gone ahead and increased the tariff rate on $200bn of additional Chinese imports from 10% to 25%, citing China’s failure to address US concerns over “unfair trading practices”.

Data wise, there was nothing to report locally; however, the Bank of England voted to hike rates by 25bps to 0.75%, the BoE governor has said further hikes would be limited and gradual. Over in the US, the final estimate for durable goods orders was a rise of 0.8% in June. It is a downward revision from the 1.0% increase initially reported in June. Meanwhile, US Jobless claims continue to hover near its lowest levels since the late 1960’s. Claims rose 218k in the week ended July 28, from 217,000 in the prior week.

Looking ahead, we will all be watching for the anticipated US employment report; expectations are to see steady employment for the month and a slight drop in the unemployment rate. On the technical front, support sits around 0.6725 followed by 0.6685, meanwhile on the upside resistance at 0.6760 and 0.6800.