Kathy Lien | Jan 03, 2020 17:23
As January kicks off, profit taking has been the primary trading theme in FX. For the second day in a row, all of the major currencies traded sharply lower on the back of renewed geopolitical tensions and softer economic data. According to the latest reports, manufacturing activity in the U.S. contracted at its fastest pace in more than a decade. FOMC minutes confirmed that rates will stay low for long and unemployment rolls in Germany rose more than expected. Yet what made investors the most nervous was U.S.-Iran relations and the possibility of a forceful revenge by Iran on the U.S. after President Trump confirmed that a top military commander was killed by U.S. airstrikes. The Australian and New Zealand dollars fell the most Friday but sterling and USD/JPY were not far behind.
Looking ahead to the first full week of 2020 FX trade, it will be a busy one. Aside from a focus on geopolitical risks, U.S. and Canadian labor-market reports are scheduled for release along with Australian PMIs, German and UK trade numbers. U.S. nonfarm payrolls and Canada’s IVEY PMI and employment reports will be the most market moving as investors try to predict the Federal Reserve and Bank of Canada’s next moves. Both central banks have said they are comfortable with keeping interest rates where they are for the foreseeable future but recent data has been weak and the worry is that further disappointments could push these central banks to ease in 2020. The Bank of Canada in particular stood pat throughout 2019 as central banks lowered rates so there’s scope for a rate cut especially as Canada’s rates stand at 1.75%. If manufacturing activity slowed in December and job growth fails to recover like economists expect, we could see a voracious beginning of the year rally in USD/CAD. More than 70K jobs were lost in Canada during the month of November so a recovery of more than 30K jobs is expected for December.
As for the U.S., nonfarm payroll growth is expected to slow at year end. Jobs rose more than expected in November and with retail sales demand easing and manufacturing activity slowing, payrolls could pull back in December. With that said, the stock market has been very strong and Black Friday sales were healthy, so job growth may not pull back as much as anticipated. We’ll get an early look at how the labor market may be performing with ADP’s employment change, Challenger’s layoff report and non-manufacturing ISM. These numbers will help shape expectations going into Friday’s release. Between the Fed’s cautiousness and the recent trend of softer data, investors are erring on the side of caution.
The Australian dollar is also in play with retail sales, manufacturing- and service-sector PMIs scheduled for release. The Reserve Bank left the door open to additional easing in 2019 so investors will be looking at these reports to see if they reinforce the central bank’s concerns. At the end of 2019, the trade deal between the U.S. and China helped to drive AUD/USD and NZD/USD sharply higher but the New Year will be the true test of whether trade improvements hold or deteriorate again ahead of the 2020 U.S. election. There are no major New Zealand economic reports scheduled for release next week leaving NZD to trade on AUD, USD and risk appetite flows.
Compared to the U.S., Canada and Australia, the reports due from the Eurozone and UK will be less market moving. From the Eurozone, revisions to service sector PMIs will be released along with Germany’s trade balance, EZ retail sales and inflation data. UK has trade, manufacturing and industrial production numbers on the calendar.
Written By: Kathy Lien
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