Market commentary: US jobs report and the currency market

The US job report released on Friday came in at 257,000, bring the total job creation number for the past 3 months above 1 million, which underscore the stronger 3-month increase since 1998. In addition to this better than expected number, data for December was also reviewed to the upside showing that the US labor market continues to make important improvements.

This month’s report was completed by an unexpected jump in wages that grew 0.5% in January, positively offsetting the concerning small decline recorded in December.

The positive labor market data prompted investors to rise the odds of an interest rate hike by the FED in the first half of the current year or in September 2015. Sources from inside the FED have stated that, although the central bank recognized the consistently improving conditions of US labor market, wages growth and an acceleration in inflation will be the main key indicators to determine any interest rate increase.

Once again the US Dollar posted daily gains against major currencies on the back of investors’ speculation of a coming interest hike, which will contribute to a US’s currency appreciation.

On Friday the Euro lost about 1.5% against the dollar, retreating to 1.1316, although this morning has already returned to the 1.1350 level.

Currencies has been a hot topic in the last few weeks with major Central Banks around the world taking steps towards measures aimed to depreciate their respective currency in a quest to productivity growth and exports’ preservation.

On January 21, the Bank of Canada unexpectedly cut its main interest rate by 0.25% to a record low of 0.75%, in its first monetary cut since 2009. The measure was deemed necessary by Canada’s central bankers in order to provide some relief to the country’s oil driven economy.

The following day, on January 22, the European Central Bank announced its so much anticipated QE program, promising to inject as much as EUR 1.3 trillion in order to stimulate the European economy and put downwards pressure on the Euro that plunged to 1.11 against the US Dollar. On February 03, the Reserves Bank of Australia went head with a somewhat anticipated interest rate cut of 0.25%, bringing the country rate to an unprecedented 2.25% low.

Such a move was deemed in line with the country’s attempt to sure up its economy heavily dependent on commodities, whose prices have been falling throughout the entire 2014, and China, whose economy seems to be slowing down while it goes through a major shift from being investments driven, to become internal consumption based. Japan had already started a massive currency devaluation and liquidity injections almost 2 years ago resulting in the Yen breaching the 119.00 level against the US Dollar during Friday trading.

This depreciating environment have been described by analysts as the new frontier of currency war among different economies all struggling, in one way or another, to cope with dropping inflation, plunging commodities exports’ value and stagnating economic growth.

The US has been the only major economy to move away from QE and monetary policy and has seen its currency substantially appreciating throughout the last 3 to 6 months.

While this trend benefits US assets, especially the ones held by international investors, such a strong and rapidly appreciated dollar is actually doomed to negatively impact the country economy, which Standards & Poor estimates derives 46% of its revenues from overseas sales.

The ongoing earnings season is already showing this negative currency impact, with major corporations from Microsoft to McDonalds, from General Motors to Pharmaceutical companies, reporting eroded margins and lower profits due to Forex exchange losses.

At this point in time one interesting question would be: “will the FED prioritize its full employment mandate and rise interest rates on the back of consistent labor market improvements, or will it prioritize its price stability mandate, remaining as dovish as possible to combat a slowing inflation?”

This article was issued by Paolo Zonno Trader/Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

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