Morning Commentary: “No Man is an Island” - John Donne

Foreign Exchange - Morning Commentary

“No Man is an Island” - John Donne

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
“No man is an island entire of itself; every man is a piece of the continent, a part of the main.”
Today’s U.S. jobs report is a reminder that the global economy is interconnected and that when other key economies of the world begin to slow, sooner or later that weakness makes its way to our shores. For the better part of a year or so, the U.S. economy has remained insulated as tax cuts and deregulation have helped to propel the economy forward, and at a faster pace; but over the past months, there have been clear signs of the U.S. economy slowing, and today’s jobs report puts an exclamation on that slowing.
May’s jobs report produced only 75,000 jobs against expectations of a gain of 175,000. In addition, April and March were revised lower. The good news was that the UR remained at a multi-decade low of 3.6% and the labor participation rate also remained at 62.8%. Inflation viewed through average hourly earnings (AHE) stayed benign at 0.2% and 3.1% YoY. U.S interest rates have moved sharply lower. U.S. 2-year interest rates initially collapsed again but are correcting back as we are writing.
Perhaps of equal importance are expectations regarding future Fed policy. The probability of the Fed cutting in June has risen from 19% to 28% and the greater likelihood of a Fed rate cut for July has risen from 66% to 76%. The U.S. dollar (DXY) has fallen sharply and is testing its lowest levels since March.
The key dynamic for traders and investors, with regards to the U.S. dollar going forward, is the fact that interest rate differentials are now moving against the U.S. dollar and will soon be validated by a Fed rate cut over the next few months. This is a reversal of the trend over the past year or so where the Fed was raising interest rates while other G7 and G10 countries were cutting their rates. How much this resonates with the investment community remains to be seen, but the interest rate differential that has kept the U.S. dollar steady to stronger is no longer the pillar that it once was.
  • The Canadian dollar is one of the top performing currencies today on the back of a better than expected May Canadian jobs report. Canada produced jobs gains of nearly 28,000 (all full-time) against expectations of a gain of 5,000. The UR dropped sharply from 5.7% to 5.4%. Hourly wages remained at 2.6%, but the labor force participation rate did drop from 65.9% to 65.7%.
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