Date: 04 Jun 2018

Perhaps the most intriguing aspect of the price action immediately following Friday’s post-US Jobs data was how measured it was. Despite the fact that the US unemployment rate fell to 3.8 per cent, an 18 year low, that Non-Farm Payrolls beat expectations with a rise of 223,000 in contrast to the 188,000 consensus among economists polled by Reuters, and that average hourly earnings posted a 0.3 per cent month-on-month rise (compared to expectations of a 0.2 per cent advance), the greenback’s advance was somewhat muted. Some traders will, perhaps understandably, wonder if that relative lack of reaction in the face of what appeared to be unequivocally robust economic data is a precursor for some degree of US dollar weakness. But US dollar weakness, by definition, means some other currency’s strength. Perhaps the uptick in euro zone inflation, and the potential that lends to ECB monetary accommodation withdrawal, could lead some traders to see a bounce higher in euro/dollar (EURUSD).

But will traders be totally comfortable with the idea that risk around Italy, or even Spain, has fully abated? As for sterling (GBPUSD), going long of cable for any period of time is essentially less of a call on the greenback and more of a judgement that Brexit negotiations, which are at a sensitive stage, will go smoothly. Traders might think that’s quite a risk. In dollar/yen (USDJPY), even putting aside the carry costs of running long yen/short USD, for many traders it might anyway seem quite a leap of faith to assume that Japan’s economic prospects compared to the United States make the yen a better option than the greenback. As for the Canadian dollar, trade and tariff considerations and the risk around the NAFTA re-negotiation, may make traders somewhat reluctant to be too short of USDCAD. As traders begin the new week perhaps the decision that has to be made, certainly for those who don’t see compelling reasons for further USD strength, is what other currency to buy. The answer may not necessarily be straightforward.

Written by Neal Kimberley, External Currency Analyst.