US Jobs Data Key to Near-Term Greenback's Fate

[Ben Graham]

Overview: The US dollar is firm against the G10 currencies today but is mostly trading inside yesterday's ranges. After yesterday's disappointing JOLTS report attention turns to the ADP estimate today, ahead of tomorrow's BLS report. The lack of follow-through selling after yesterday's losses may be encouraging some short-term momentum traders to move to the sidelines. The greenback is also mostly higher against emerging market currencies, though a few Asia Pacific currencies bucking the move, including a small gain for the Chinese yuan. 

The pullback in yields seen yesterday is continuing today. Steady demand at Japan's 30-year bond auction helped JGBs rally. European benchmark yields are off 3-5 bp with spreads over Germany narrowing slightly, including France. The 10-year US Treasury yield has slipped below 4.20%. Equities, following the gains in the S&P and Nasdaq yesterday, are mostly higher. The notable exception in China and Hong Kong, following reports that suggested Beijing officials are considering measure to cool the recent rally. Europe's Stoxx 600 is building on yesterday's 0.65% recovery after Tuesday's 1.5% slide. US index futures are trading with a firmer bias, as well. After surging to a record $3578.5 yesterday, profit-taking sent gold down a little through $3512 today before buyers re-emerged. October WTI is extending its pullback after briefly trading above $66 on Tuesday. It fell to almost $63.70 yesterday and nearly $63.00 today. 

USD: The disappointing July JOLTS report pushed what was an offered Dollar Index lower. It had peaked earlier slightly above Tuesday's high, slightly shy of 98.65 and returned to almost 98.00. It is consolidating today in a narrow range mostly between 98.10 and 98.35. Still, when everything is said and done, with one brief exception of Monday's low, the Dollar Index remains within the range set on August 22, when Fed chief Powell spoke at Jackson Hole (~97.55-98.85). There is a slew of US economic reports today. Given that the deterioration of the labor market is behind the elevated chances of a Fed rate cut later this month, the ADP private sector job estimate may be the most important. The median forecast in Bloomberg's survey stands at 68k, down from 104k in July. Given the US tariff offensive, the July trade balance will also draw attention. The advanced goods deficit widened by 22% to $103.6 bln. Imports jumped 7.1% and exports slipped by 0.1%. The overall trade deficit was $582.7 bln in H1 25, up from $421.2 bln in H1 24, though distorted by front-running the tariffs. The ISM services report is more important than the final services and composite PMI. The ISM services were slightly above 50 in July, while the services PMI was at 55.7 (before slipping to 55.4 in August, according to the preliminary estimate. Lastly, the accelerated confirmation hearings of Miran to the Federal Reserve will be held today before the Senate Banking Committee. Despite his earlier work, which includes sketching out how the executive could control the central bank, Miran's prepared remarks pledge to defend the independence of the Federal Reserve. What could go wrong? 

EURO: The euro held above $1.1600 yesterday and recovered to poke a little above $1.1680 in North America. With the exception of last Wednesday's low (~$1.1575), the euro has also been confined to the range set on August 22 (~$1.1585-$1.1745). It is in about a third of a cent range below $1.1670 so far today. The broad sideways movement has wreaked havoc with the daily momentum indicators. We note that the US two-year premium over Germany is a new low for the year, slightly below 165 bp. Last year's low was around 135 bp. It was above 200 bp as recently as late July. The eurozone reported a 0.5% decline in July retail sales, which was a bit larger than the 0.3% drag expected by the median forecast in Bloomberg's survey. Yet, it should not be surprising. Germany (-1.5%), France (-0.6%), and Spain (-0.4%) already had reported their figures. Italy reports its figures tomorrow. 

CNY: The dollar held below CNH7.15 on Tuesday and Wednesday. It traded inside Tuesday's range yesterday in a consolidative session and is trading within yesterday's range today. If the PBOC signaled through the setting of the dollar's reference rate that did not want the yuan to rise much more, then it may be challenged if the greenback continues to weaken. The PBOC set the dollar's reference rate higher for the third consecutive session yesterday, matching the longest run in five months. Given the dollar's heavier tone, especially in North America yesterday, the PBOC had little choice but to lower the dollar's reference rate today (CNY7.1052 vs CNY7.1108 yesterday). Two developments are noteworthy today. First, while the Federal Reserve protects it independence, China's Vice Finance Minister, and the Deputy Governor of the PBOC met today and committed to closer cooperation to support the economy. Many suspect that loose monetary policy can help support more public spending to strengthen growth. Second, Chinese financial regulators are considering measures to temper the stock market rally, which could include the removal of some short selling restrictions. The mere fact that it is being discussed weighted on Chinese equities today, sending the CSI 300 down 2.1%, the biggest loss in five months.

JPY: The weak JOLTS report pushed US rates lower and dragged the dollar off its highs against the yen. The 30-year Treasury yield got as close to 5.0% without trading there before falling back below 4.90% to approach last week's settlement slightly below 4.88%. The 10-year yield Treasury yield dropped ten basis points to fray the 4.20% yield, the lower end of what has been the range since early May. The dollar has reached nearly JPY149.15 in late Asia/early Europe hours but never traded above JPY148.80 in North America before falling below JPY148. It made a marginal new low today near JPY147.80 but recovered to about JPY148.40 in early European turnover. Japan reports July labor cash earnings tomorrow. They are hovering around 3% year-over-year. Yet, when adjusted for inflation, they have mostly been falling, with a few exceptions, like the end and middle of last year. Yet consumer spending has been positive though weak, averaging a little more than 0.6% over the past three quarters at an annualized rate through Q2 25. July household spending will be reported at the same time. It is expected to have accelerated to 2.3% year-over-year from 1.3% in June. If so, it would be the third consecutive advance, the longest in three years.

GBP: Neither vulnerability of the Deputy Prime Minister Rayner over unpaid taxes on a property purchase, the announcement of what seems to be an unusual late Autumn Budget Statement (November 26), or the looming fiscal challenge was sufficient to hold sterling back yesterday. Indeed, sterling rivalled the Australian dollar for the top performance yesterday among the G10 currencies. Follow-through selling from Tuesday initially took it to a new low since August 6 slightly below $1.3335. From there is recovered to almost $1.3460 new session highs, which held today. Initial resistance is seen in the $1.3470-85 area. The $1.3400-20 area offers support. The market did not respond much to the UK's new car registrations (a proxy for auto sales). They were off 2% after falling 5% year-over-year in July. The August construction PMI ticked up to 45.3 (from 44.3) but has not been above the 50 boom/bust level this year. 

CAD: In the better offered greenback, the Canadian dollar under-performed. It was the weakest of the G10 currencies, losing a miniscule 0.1%. Still, the greenback barely traded below Tuesday's settlement yesterday, while it held below Tuesday's high (~CAD1.3815) in lackluster activity. The US dollar is a little firmer today and threatens to extend its advancing streak for the fourth consecutive session. It is at the week's high in Europe and is probing the lower band of resistance seen in the CAD1.3825-50 area. Given the importance of the trade drag on Q2 GDP, today's July merchandise trade figures will be closely watched. Canada recorded a C$19 bln goods deficit in Q2, swelling from a little less than C$400 mln deficit in Q1. The median forecast in Bloomberg's survey is for a C$5.3 bln shortfall in July. In July 2024, the deficit was a little more than C$320 mln. 

AUD: The Australian dollar traded well below $0.6500 on Tuesday but held above it yesterday and rallied to almost $0.6555. Around half of the recovery occurred in the European morning and the other half when North Americans entered the fray. It is trading with a heavier bias today but still inside yesterday's range, which was inside Tuesday's range (~$0.6485-$0.6560). Australia reported its July trade balance earlier today. It defied expectations of narrowing and instead swelled to A$7.3 bln after surging to almost A$5.4 bln in June (from A$1.6 bln in May). Exports rose by 5.1% on the month, while imports fell 1.3%. Today's July figures showed household spending increased 0.5% in July, for a 5.1% year-over-year pace, the strongest in almost two years. Although Australian interest rates eased today, central bank governor Bullock noted after the stronger GDP figures earlier this week that the data was stronger than officials expected, and noted that if it continues, "there may not be many interest rate declines yet to come." 

MXN: Despite the greenback's struggle yesterday, the peso was unable to capitalize. The US dollar traded well within Tuesday's session in mostly featureless activity. Yesterday's low was recorded in response to the JOLTS report, a little below MXN18.66. The greenback's recovery ran out of steam in front of MXN18.73 but rose to almost MXN18.7650 today. Tuesday's range, roughly MXN18.6225-MXN18.8635 still dominates. Mexico reports June fixed investment and private consumption, July leading economic indicators, and August auto sales. While they may be useful data points for economists, they probably do not capture the imagination or attention of market participants. US jobs data and the broad direction of the dollar are more salient drivers of the exchange rate. 

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