USD Can’t Hold Onto Gains After Employment Data

Nonfarm payrolls came -33k in September, from an upwardly revised 169k in August, data showed on Friday. Even though the NFP number appears extremely low, the weakness was attributed mainly to hurricanes Harvey and Irma and thus, this is likely to have little impact on the Fed’s thinking. Average hourly earnings accelerated sharply, but that may also be seen as a temporary effect as workers that were employed in reconstruction after the hurricanes likely received higher over-time salaries. Perhaps the most noteworthy aspect of the report was the unexpected drop in the unemployment rate, as in a model framework this implies faster wage growth in the future.

Therefore, stripping out the transitory effects, this was still a decent employment report overall and as a result, the probability of a December Fed rate hike jumped to 90%, according to the Fed fund futures. The dollar gained at this release, but only briefly, with the currency giving back its gains in the next hours to trade even lower against most of its counterparts.

Although the catalyst for the reversal was not entirely clear, we think it may be related to reports that hit the wires at that time suggesting North Korea would carry out a missile test over the weekend. This may have driven safe-haven flows back into US treasuries. The focus of USD traders is now likely to turn to the FOMC minutes on Wednesday and even more importantly, on the inflation data due out Friday.

EUR/USD traded lower on Friday after the US employment data were out, but hit support fractionally above 1.1660 (S2) and was quick to recover and gain even more in the following hours. The rate emerged back above 1.1720 (S1) and we see the prospect for the recovery to continue and perhaps challenge again the 1.1790 (R1) line. Nevertheless, we stick to our guns that as long as EUR/USD is trading below the key barrier of 1.1830 (R2), the near-term outlook remains cautiously negative. We would treat any further recovery as a corrective phase and we would expect the bears to take charge again soon, perhaps for another test near the 1.1660 (S2) zone.

Loonie recovers somewhat alongside full-time jobs

The Canadian dollar gained somewhat on Friday as well, following Canada’s employment report for September. The unemployment rate surprisingly declined, though that may be owed primarily to a drop in the labour force participation rate. What likely caught investors’ attention was the fact that lots of part-time jobs were replaced with full-time ones, which is undoubtedly a positive development for the nation’s labour market.

Despite Friday’s recovery in the Loonie, we believe that the outlook for the currency is neutral at the moment. Economic data have been on the strong side recently, but the BoC has expressed some preliminary concerns regarding the currency’s strength and has provided no signals it is likely to hike again at the October meeting. We believe that the CAD’s near-term outlook will become much clearer towards the latter part of the month when we get the nation’s inflation data for September ahead of the BoC gathering.

USD/CAD slid on Friday following Canada’s better-than-expected jobs report, after it hit resistance at 1.2600 (R1). However, the slide was stopped by the 1.2525 (S1) support line. The pair continues to print higher peaks and higher troughs above the short-term uptrend line taken from the low of the 15th of September, but it is also trading very close to the longer-term downtrend line drawn from back at the peak of the 5th of May. As such, we prefer to take the sidelines for now. A decisive break above the crossroads of that downtrend line and the 1.2660 (R2) is needed to make us confident on larger bullish extensions. Something like that may open the way for the 1.2750 (R3) resistance zone. On the other hand, a dip below the short-term uptrend line drawn from the low of the 15th of September may confirm the rejection from near the aforementioned longer-term downtrend line and is likely to turn the picture back to negative.

Today’s highlights

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The economic calendar is almost empty today. We just get Germany’s industrial production for August, while on the speakers’ agenda, we have only ECB Executive Board member Sabine Lautenschlager.

As for the rest of the week:

On Tuesday, Norway’s inflation data for September are due out while on Wednesday, the main event will likely be the release of the minutes of the September FOMC policy meeting. On Thursday, we get Sweden’s CPI for September and finally on Friday, the US CPI and retail sales data for the same month will be in the spotlight.

• Support: 1.1720 (S1), 1.1660 (S2), 1.1615 (S3)
• Resistance: 1.1790 (R1), 1.1830 (R2), 1.1870 (R3)