USD Hit By Convergence Of Negative News

Daily FX Market Roundup 12.06.2018.

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

A convergence of bad news sent equities and currencies tumbling lower. U.S. assets were hit the hardest Thursday with USD/JPY falling to a fresh one-month low and the Dow Industrial Average dropping more than 750 points intraday. Although stocks rebounded off the lows into the close, risk aversion remained. Thursday’s sell-off started with the decline in yields. Having breached 3% on Monday, 10-year Treasury rates dropped below 2.9% on concerns about inflation and growth. But what really kicked off the decline in stocks and Asian currencies was the arrest of Huawei’s CFO and Deputy chairwoman Wanzhou Meng. Huawei is one of China’s largest tech companies and she is the founder’s daughter. Her arrest has been met by anger and surprise and the Chinese government has asked for an immediate release. On paper, the Trump Administration wants to look like it is willing to work with China on trade but the seriousness of its intentions are questioned by this arrest. Instead of focusing on reconciliation and negotiation, the U.S. has made it clear that it is not going soft on China. Unfortunately this is a very delicate time for negotiations and Thursday’s move is a major setback to U.S.–Chinese relations. As a result, equities and currencies sold off aggressively on the fear that no agreements will be made in the next 90 days, triggering the next round of tariffs.

US data also failed to impress. Jobless claims increased, ADP reported a much smaller-than-expected rise in employment and according to Challenger, Gray & Christmas, job cuts rose 51.5% y/y in November. The trade balance also widened while factory orders and durable goods fell. The only good news was service-sector activity. Instead of falling, the ISM non-manufacturing index rose to 60.7 from 60.3 but the employment component of the report declined. None of this is good news for Friday’s jobs report. As you can see by the list below, there are more reasons to believe that job growth slowed than improved in November. Not only did ADP report significantly lower employment change but the 4-week moving average of jobless claims increased, consumer confidence is down and most importantly, the employment component of the service-sector activity report fell. The US labor market is one of the strongest parts of the economy but with stocks falling sharply over the past 2 months, businesses may have grown more conservative about hiring. Economists are looking for weaker job growth and if their outlook is confirmed, the dollar could extend its slide. Wage growth will also be important because that’s where the forecast diverges with market sentiment. Economists are looking for an uptick in wages and if they are wrong, the sell-off in the greenback could be even more significant with USD/JPY eyeing a test of 112.

Arguments In Favor Of Stronger Payrolls

1. Employment Component of Manufacturing ISM rises to 58.4 from 56.8
2. Continuing Claims Drop to 1.63M from 1.67m

Arguments In Favor Of Weaker Payrolls

1. ADP drops to 179k from 225k
2. Employment Component of Non-Manufacturing ISM drops to 58.4 from 59.7
3. Challenger Reports 51% Increase in Layoffs
4. 4-Week Average Jobless Claims Rises to 228K from 213k
5. University of Michigan Consumer Sentiment Index drops to 97.5 from 98.6
6. Consumer Confidence Index Drops to 135.7 from 137.9

Considering that the source of market anxiety is US-Chinese trade relations, it/s no surprise to see that the Australian dollar was the day’s worst-performing currency. Recent economic reports have been disappointing with the trade surplus shrinking instead of expanding. Although retail sales increased, the improvement was lost amid all of the negative news and risk aversion. Technically, AUD/USD has fallen below the 20-day SMA for the first time since early November and this move signals a deeper correction toward 71 cents. NZD fell in sympathy with AUD but Canadian dollar traders have their own reasons to be worried. The first day of the OPEC meeting ended with no deal. Russia is resisting pressure to cut production and with its pushback, oil prices are down 2%. Bank of Canada Governor Poloz also sounded less hawkish in his economic assessment – he said data since October has been disappointing and therefore the current level of rates is appropriate for the time being. They are worried about oil and the US-China trade war and need to do more work to understand how much of a shock the oil decline will have on their economy. All of this implies that they are in no rush to raise interest rates again. USD/CAD will be in focus on Friday with a number of factors affecting the currency including OPEC, US and Canadian employment reports.

Euro and sterling, on the other hand, traded higher against the greenback. No news is good news for EUR/USD, which continues to trade in a tight range. Meanwhile, sterling traders are staying on the sidelines as they wait to see if the UK Parliament supports Prime Minister May’s Brexit deal. A lot is at stake and despite talk of delaying the vote, May is pressing forward with the December 11 date, saying that it's her deal, no deal or no Brexit. The day before, the European Court of Justice is set to decide if Britain can halt Brexit. Next week is judgment week for Brexit, the pound and Prime Minister May so we expect further consolidation ahead of these big decisions.