Currency markets witnessed a continuation of yesterday’s trend during the overnight session, one which is characterized by a resurgence in USD strength as a result of comments from Atlanta Fed President Lockhart. The key takeaway from Lockhart’s message was that in his view the US economy is ready to begin the process of monetary policy normalization, and that it would take a significant deterioration in data to deter him from recommending a rate hike at the September meeting. The hawkish comments from Lockhart took the markets by surprise given he is seen as a centrist on the FOMC, usually echoing the consensus viewpoint and not straying too far to either side of the hawkish or dovish spectrum. This is also a change in tone from his earlier comments in the year when he was inclined to take the risks of waiting as opposed to moving too early on raising rates, along with the fact that he qualified the FOMC’s last statement by saying the piece on “some further improvement in the labour market†was a way to convey to the market the Fed is getting close to beginning the tightening process. Consequently, the greenback rocketed into the close of yesterday’s session as traders and market participants added exposure to the big dollar, though focus has now shifted to ADP Employment Report and clues as to the overall health of the American labour market.
A notably outperformer in the currency space midway through the European session has been Sterling, with the pound eliciting strong demand ahead of tomorrow’s macro events. GBPUSD was able to shake off a somewhat disappointing service sector PMI earlier in the session, which came in at 57.4 as opposed to the 58.0 that had been expected. The potential for two to three dissenters at tomorrow’s Bank of England policy meeting along with a quarterly inflation report that upgrades the outlook has underpinned pound demand, with the GBPUSD pair being the best performing major as traders position themselves ahead of tomorrow’sreleases.
Heading into the North American open, the commodity complex (with the exception of copper) is well bid, specifically with front month WTI and Brent finding support in the $45 and $50 regions respectively. European equities are well in the green midway through their session, and the investor optimism has filtered through to North America as S&P futures have displayed positive price action heading into this morning’s data deluge. The first of the economic data to be released was the ADP employment report, which threw a curveball to the USD-bull camp, reporting that the private sector created only 185k jobs over the month of July, below the median analyst expectation of 215k, and well off June’s print of 229k. While the greenback experienced a moderate bout of downward pressure exerted after the ADP release, the real focus is the jobs number released on Friday and whether today’s ADP report is a foreshadowing of what is to come.
Also on the economic docket this morning were trade balance figures from both Canada and the US for the month of June, both important as inputs into second quarter GDP figures. There was somewhat of a divergence between the two reports in June, with the trade deficit in the US widening from May’s $40.9bln to $43.8bln, while Canada’s narrowed from $3.4bln to only $0.5bln. As a welcome development for a Canadian economy that has been plagued with less than stellar economic data as of late, exports increased from just under $42.0bln in May to $44.6bln in June, a positive move in the right direction given recent concerns from the Bank of Canada. In addition, there was finally some improvement in the non-energy export sector, with consumer goods leading the charge for the increase in exports as that segment rose by 17.2% from the previous month. Consequently, the loonie has managed to generate a significant bid tone on what is likely some position trimming and profit taking from the recent move higher, while traders reassess the economic landscape and ready themselves for Friday’s NFP.
Further reading:
ISM Non-Manufacturing PMI leaps to 60.3 points – USD higher
USD Moves Higher, Looking At EURUSD & USDCHF – Elliott Wave Analysis
