Headlines
• UK rate hike expectations pushed back – Markets see no hike until September 2016.
• GBP/EUR loses 100 pips – Traders continue to unwind carry trades.
• ‘Cable’ hits four-month low – Despite mixed NFP report.
• Canadian unemployment rises – Due to swelling labour market participation.
Sterling
The Pound failed to attract much demand on Friday as Thursday’s dud service sector report – the slowest for two years – continued to weigh on the minds of currency traders. Despite Bank of England Governor Mark Carney’s hawkish rhetoric – he suggested last Saturday that the bank would likely begin raising interest rates in the early stages of 2016 – money markets don’t currently have the first BoE hike priced in until September of next year due to concerns over global headwinds, most notably from China.
Sterling will struggle against its most-traded counterparts if markets continue to push back their rate hike expectations but the Pound could claw back some of its recent losses if this week’s BoE policy report shows that hawkish momentum is growing within the nine-person Monetary Policy Committee (MPC). However, recent domestic results and the market turmoil in China mean that MPC members may opt to err on the side of caution at this moment in time.
The Pound to Euro exchange rate slid lower by over a cent on Friday as markets shrugged off the European Central Bank’s cautionary policy statement, which was seen by most analysts to pave the way to further bouts of quantitative easing.
It seems that with Chinese markets closed in the run-up to the weekend for the 70th Anniversary of WWII Victory Day the Euro was supported by a further unwinding of carry trades as investors feared that the Chinese market could suffer another round of large losses upon opening.
The Euro has appreciated by around six cents over the Last few weeks in reaction to this large-scale unwinding of contracts priced in Euros, borrowed at rock-bottom rates thanks to the ECB’s expansive QE programme.
Sterling declined by around -80 pips against the US Dollar on Friday to strike a four-month low following the release of the latest US non-farm payroll report. Markets moved their September Federal Reserve rate hike bets forward by around 4% following the NFP report but the mixed bag was generally seen as a sign that Fed officials will refrain from tightening policy this month.
Compared to forecasts of 217,000 the US economy added just 173,000 new jobs in August, which was seen as a negative impact. But markets were buoyed by a fall in unemployment from 5.3% to 5.1%, which puts the jobless rate inside the Fed’s target range of 5.0%-5.2%. However, the fall in unemployment was largely caused by a further drop in participation, which currently stands at a 38-year low of 62.6%.
Given Fed President Janet Yellen’s proclivity to avoid taking unnecessary risks it seems more likely that the US central bank will delay a lift off on rates until later in the year.
The Pound to Canadian Dollar exchange rate was subject to volatility on Friday but ultimately the pair closed for the weekend close to the levels that it began trading on Friday morning.
Canadian unemployment rose unexpectedly from 6.8% to 7.0% but the un-telegraphed rise in joblessness did not hamper the ‘Loonie’ because it was caused by a rise in the number of Canadians looking for work. In nominal terms, the Canadian labour market grew by around 12,000 in August and most of these jobs were full-time positions.
However, there is potential for steep ‘Loonie’ losses if the Bank of Canada opts to react to the recent volatility in commodity markets by cutting interest rates again on Wedmesday.
In keeping with risk-off trends, the Pound managed to appreciate by around 150 pips against the Australian Dollar on Friday afternoon as traders deemed the mixed US NFP report to have a slightly positive influence on Fed rate hike bets. This reduced demand for the commodity-sensitive ‘Aussie’ Dollar.
The New Zealand Dollar followed its Antipodean counterpart the ‘Aussie’ lower versus the Pound on Friday as a slender uptick in US rate hike bets bolstered the appeal of Sterling. GBP/NZD rose by around 200 pips on Friday.
Data Released Today
09:30 EUR Euro-Zone Sentix Investor Confidence (SEP) 18.4