Week Ahead – US Wage Gains Lift Dollar Despite Jobs Miss

Solid economic data supports USD

The markets picked up where they left off last year. The release of the FOMC minutes from the December meeting and President-elect Trump’s tweets impacted prices and almost overshadowed the release of the biggest economic indicator: the non-farm payroll report.

The U.S. Federal Reserve published the minutes from its December meeting. The last policy meeting of the year brought the second rate hike in the current tightening cycle. The views from Fed members who voted unanimously for a rate hike is now in line with that of the market. Although the Fed is non-partisan it did read the writing on the wall regarding the infrastructure spending on its way via President-Elect Trump and will move to pro actively contain inflation with 2 to 4 rate hikes this year.

The NFP released on Friday, January 6 fell short of expectations with a 156,000 new jobs added to the economy, but with the mixed news of a post-crisis high in terms of wages with a 2.9 percent year over year increase it was a positive for the American currency as another sign of diminishing slack in the economy.

The U.S. retail sales data will be released on Friday, January 13 at 8:30 am EST. Forecasts call for an improvement in the total value of sales in the United States in December. The American Producer Price Index (PPI) data will also be published on the same day. The preliminary Consumer Sentiment compiled by the University of Michigan will be posted at 10:00 am EST. The market expects a mixed bag of economic releases, as December was a good month for retailers but not as positive for producers.

The EUR/USD lost 0.02 percent in the last week. The pair is trading at 1.0528. The single currency was mostly flat despite having a swing of 2.7 percent during the week. The pair traded in a range as high as 1.0623 and as low as 1.0340. The USD lost some traction after closing strong 2016 with a rate hike announcement by the Federal Reserve. The central bank once again forecasted multiple rate hikes and along with the words of the President-elect it made for an expectation of higher growth and inflation. The return from year end holidays were not kind to the USD who lost some ground until the minutes from the Fed meeting were released and it recovered most of the ground lost even with a tepid jobs number on Friday.

Next week’s economic calendar does not feature major events until later in the week when the U.S. will report its retail sales and producer price inflation. The USD had a mixed week overall, but with Trump having such an effect without being in office his words will carry even more weight after his inauguration on January 20.

The USD/MXN gained 2.95 percent in the last five days. The pair is trading at 21.2214. The U.S. dollar advanced as positive economic data and President-elect Trump’s tweets put downward pressure on the Mexican currency. Trump’s criticism of American and Japanese automakers for their decision to build in Mexico and import into the United States could backfire as he threatened a “border tax”. The anti-trade rhetoric is particularly negative for Mexico as it exports more then three quarters of its production to its northern neighbour. So far its unclear if Trump’s words are a remnant of his campaign or if he intends to follow through on his desire to scrap or heavily renegotiate NAFTA.

The Bank of Mexico has forced to intervene to slow down the fall of the peso. The move was somewhat effective, but its an expensive proposition to keep this strategy in place when the currency is being used as a proxy due to its liquidity. The peso has decoupled from its fundamentals and is now used to hedge emerging market and speculative short term positions.

The XAU/USD rose 1.76 percent in the last five days. Gold was trading at 1171.75 after the release of the U.S. NFP jobs report. The precious metal has posted a second positive week in a row despite a small setback on Friday. 2017 is anticipated to be a politically charged year, which is a positive for gold as it will boost demand for the metal as a safe haven.

Market events to watch this week:

Monday, January 9
7:30pm AUD Retail Sales m/m
8:30pm CNY CPI y/y
Wednesday, January 11
4:30am GBP Manufacturing Production m/m
10:30am USD Crude Oil Inventories
Thursday, January 12
8:30am USD Unemployment Claims
7:00pm USD Fed Chair Yellen Speaks
Friday, January 13
8:30am USD Core Retail Sales m/m
8:30am USD PPI m/m
8:30am USD Retail Sales m/m
10:00am USD Prelim UoM Consumer Sentiment

*All times EDT