Market Analysis

Columbus Day Reflections

Friday’s uptick in September’s US average hourly earnings, although it was at least partially a consequence of Hurricanes Harvey and Irma, helped the currency market to look through the headline drop of 33,000 in the same month’s non-farm payrolls. The odds of a December US rate hike rose again while, in the face of a fall in the US unemployment rate to 4.2 per cent, the Fed’s Eric Rosengren said over the weekend that “prudent risk management would argue for the continued gradual removal of monetary policy accommodation in order to minimize the risk of outcomes that might prematurely shorten the current economic recovery.” “Drawing on lessons from the 1990s and 2000s,” wrote Morgan Stanley on Monday, [the US bank expects “the Fed to lift real interest rates from here [and] to lean against easy financial conditions as long as private sector risk attitudes hold up and investment growth remains solid” noting that “indeed, the market has started to price in more Fed rate hikes.”

But as the new week begins, and taking into consideration that Monday is a US public holiday (Columbus Day), the price action in the currency market suggests currency traders are not yet convinced that such a scenario necessarily lends itself to ongoing US dollar strength. The greenback rallied Friday but couldn’t hold its gains even into the end-of-week New York close. That may give US dollar bulls pause for thought especially given that there is also now a gap before the release of US PPI and CPI data, on Thursday and Friday respectively.

Written by Neal Kimberley, External Currency Analyst.