On the heels of a surprisingly strong employment data set this morning, the United States Dollar is returning to the front of the G10 pack and gaining ground against all major currencies this morning.
Overview
This morning’s release showed the US economy added 216,000 jobs in the month of December, higher than expectations and last month’s figure. The unemployment rate also ticked down to 3.7% from 3.8%. While November’s nonfarm payroll number was revised down from 199,000 to 173,000, December’s figure more than makes up for such a revision and shows that the US labor market continues its streak of surprising resilience in the face of substantial tightening measures over the last year from the Federal Reserve.
On today’s news, equities are extending their losses, and US equities, in particular, are headed for their first weekly loss since October. Emerging market currencies and riskier assets in general are following suit. A strong jobs figure – once again, as has been the theme of this week – is prompting a further reassessment of the markets’ rather overzealous predictions of up to six 25-basis point cuts from the Federal Reserve this year. These bets have already been hedged back fairly substantially, and today’s figure warrants further repricing. In December, oddsmakers had fully priced in the first cut of 2024 coming from the Fed at its March meeting, but the odds of such an action now are down to just 55%. This, in effect, makes the March meeting ‘live’ and promises a volatile Q1 of this fledgling year. All in all, market expectations are moving closer to where the Federal Reserve itself sees the end of 2024, with three 25-basis point cuts.
The Fed, however, may have been banking on a lower payroll print as such a strong number could pose a threat to their carefully engineered soft landing scenario. The governors were looking for further cooling in the labor market, and fears continue to swirl that sustaining interest rates at their current levels for longer could push the US economy into a recession. Undoubtedly, though, strong data still means a strong Dollar, and USD is likely to wrap the week on top of the G10 board.
What to Watch Today…
EUR ⇓
The single currency slid further from yesterday’s close against USD after gaining such ground back on Thursday to open this morning nearly 1.5% weaker since the start of this calendar year. Euro-zone CPI showed that inflation in the region grew in line with expectations, at 2.9% annually and with a stickier core reading of 3.4% year-over-year. In conjunction with today’s US jobs data, it seems markets do now expect that the European Central Bank will fall on the dovish end of the spectrum and may cut interest rates further and faster than its peers.
CAD ⇓
The Loonie today is finding itself victim to both Dollar strength and weakness in its own labor market. Contrasting with the US labor prints this morning, Canada’s economy added less than a thousand jobs in the month of December on expectations of 15,000. While its unemployment rate did come down slightly to 5.8%, the contrast between US and Canadian headline prints is driving CAD down today in tandem with the rest of its G10 peers.
