Focus Turns Back to US with Non-Farm Payrolls Watched

Focus of the market will turn back to US economic data today. Economists expect non-farm payroll to show 180k growth in the US job markets in July, down from prior month’s 222k. Unemployment rate is expected to drop to 4.3%. Average hourly earnings are expected to grow solidly by 0.3% mom. Looking at other employment related data, ADP private job growth slowed to 178k in the same month, down from 191k. Nonetheless, the three month average of ADP rose 10k from 191k to 201k. Employment component of ISM manufacturing dropped to 55.2, down from 57.2. Employment component of ISM services also dropped to 53.6, down from 57.8. Initial jobless claims were steady though, with four month average improved from 244k to 242k. Conference board consumer confidence also rose from 117.3 to 121.1. Other employment related data were mixed in general. Also from US, trade balance will be released.

After last FOMC meeting, it’s clear that Fed policy makers prefer to start balance sheet normalization first in September. They would hold their cards for another rate hike till December. We believe the key for Dollar now is whether Fed will really hike again in December. Based on subdued inflation outlook, the risks are more skewed to the downside. That is, a month of upside surprise in non-farm payroll and wage growth might solidify the case for a December hike a little. But markets could be more aggressively pricing out of a December hike on downside surprises. Currently, Fed funds futures are pricing in only around 45% chance of a hike in December.

Canadian job data also a key focus

Another focus of the day is Canadian job data. Economists expect the Canadian economy to add 19k jobs in July. Unemployment rate is expected to be unchanged at 6.5%. Canada will also release Ivey PMI and trade balance. USD/CAD lost much downside momentum after hitting 1.2412 late last month and turned into consolidation. 1.2460 being a key support level is see as a factor limiting the loonie. WTI crude oil breached 50 handle briefly this week but failed to sustain above that level. This is seen as another factor. But based on BoC’s last statement, it’s cleared that after the rate hike, the central bank is still open to further tightening. Hence, we’d likely see the Canadian Dollar regain strength if upcoming data from the country are promising.

GBP/USD and GBP/JPY hold on to support after BoE selloff

Sterling dropped sharply against Euro yesterday after dovish BoE statement and inflation report. But the Pound is holding above near term support at 1.3096 against Dollar and 144.01 against Yen so far. With the newcomer Silvana Tenreyo supporting to maintain the status quo, the BOE split changed to 6-2 from 5-3 in June. Ian McCafferty and Michael Saunders continued to believe a 25 bps rate is needed. The members cut the GDP growth outlook to 1.7%, from 1.9% previously, for 2017 and 1.6%, from 1.7% previously, for 2018. Inflation outlook is revised modestly higher to 2.7% (2.6% previously) for this year and unchanged at 2.6% for 2018. The forecast for 2019 also stays unchanged at 2.2%.

Governor Mark Carney warned that Brexit uncertainty is weighing on the country’s economic outlook. He suggested that if "households and business look through the flurry of headlines then the economy can be expected to pick up" but the current economic performance is "sluggish". The Governor added that the uncertainty over Brexit negotiation "weighs on the decisions of businesses and households and holds down both demand and supply". Note, however, that the downgraded growth forecast for 2017 was based on a "smooth" Brexit in 2019. This, according to Carney, remains the "most realistic assumption".

More about BoE in

• Bank of England Review – More Dovish But Still Too Optimistic on Growth
• Sterling Tumbles as BoE Keeps Rates on Hold, Cuts Growth Forecasts
• BOE Voted 6-2 to Leave Rate Unchanged, Downgraded Growth Outlook
• Comments on the Sterling, after the Bank of England Leaves Interest Rates at a Record Low
• Markets Shrug Off BoE Interest Rate Warnings
• GBP/USD Slumps as BoE Votes 6-2 to Hold Policy Unchanged

Elsewhere

Japan labor cash earnings dropped -0.4% yoy in June. Australia retail sales rose 0.3% mom in June. German factory orders rose 1.0% mom in June. Eurozone retail PMI will be featured in European session.

USD/CAD Daily Outlook

Daily Pivots: (S1) 1.2553; (P) 1.2585; (R1) 1.2619; More….

Intraday bias in USD/CAD is turned neutral with 4 hour MACD crossed below signal line. Consolidation from 1.2412 short term bottom might extend. But in case of another rise, upside should be limited by 38.2% retracement of 1.3346 to 1.2412 at 1.2769 to bring fall resumption. On the downside, break of 1.2412 will extend recent fall from 1.3793 to next key fibonacci level at 1.2048. However, sustained break of 1.2769 will bring stronger rebound back to 55 day EMA (now at 1.2927) before resuming the larger fall.

In the bigger picture, price actions from 1.4689 medium term top are seen as a correction pattern. Fall from 1.3793 is seen as the third leg and should target 50% retracement of 0.9406 to 1.4869 at 1.2048. At this point, we’d look for strong support from there to contain downside and bring rebound. However, firm break there will target 100% projection of 1.4689 to 1.2460 from 1.3793 at 1.1564.

Economic Indicators Update