Week in FX Americas – USD Rally Hits Low Wage Wall

• U.S. NFP Added 252,000 Jobs in December but Wages Fell 0.2%
• Fed Minutes Show Patience is a Virtue
• Canadian Employment Data Disappoints

The December nonfarm payrolls (NFP) report published today showed the United States added 252,000 jobs which made the unemployment rate drop to 5.6%. Expectations were exceeded even after the impressive November NFP figures. So what happened? A year ago this type of figures would have boosted the USD versus major pairs. The difference has been the Federal Reserve’s reading of the report and the lessons imparted to the market. The Fed made it clear that it would look beyond the headline number of jobs added and the resulting employment rate as they not telling the full story on employment.

A dashboard was implemented that tracks more indicators that do not show a clear recovery from pre-crisis levels. The December report said average hourly wages fell from the previous month and had a low yearly growth 0f 1.7%. Employment has been the go-to indicator to predict the benchmark interest rate hike by the Fed. Signs of weakness in the labor market translates into patience for Chair Janet Yellen and the Fed. The futures market is now pricing in a September rate hike as opposed to the spring expectation after Yellen let it slip that a rate hike was possible six months after the end of the bank’s bond-buying program.

With the European Central Bank (ECB) failing to persuade Germany to approve a sovereign bond purchase program to stimulate the flagging European economy, and the Fed having the luxury of patience, the interest rate divergence fueling the FX market volatility hit a wall. The Fed can afford to be patient, but it’s clear the ECB is feeling the pressure to act, and its officials are looking for ways to avoid the deflation crippling the eurozone from spiraling out of control. The ECB’s January 22 meeting could kick-start the USD rally.

Meanwhile, a second monthly decline of Canadian jobs drove the loonie down versus the U.S. dollar. The Canadian economy lost 4,300 jobs in December, well below an expected gain of 15,000. However, there seems to be good news in the report, as full-time jobs appear to be recovering while the drop in part-time jobs registered the negative net result. Bad employment news in an energy-producing country has a magnifying effect, as the production glut will punish what was Canada’s top province economically last year. Alberta was the main driver of the Canuck economy with energy production leading the way. The hope for Canada now is that with the lower CAD, manufacturing in Ontario, the country’s most populous province, can offset the losses out west and swell job creation.

Next Week for the Americas

Last week, the FX market was full of big releases. Next week will not be as action packed. The European Court decision has the potential to move the market the most if there is an unexpected outcome to the ruling on the legality of European Stability Mechanism. In Asia, Chinese new loans data will be reported. Analysts have begun to anticipate a Chinese credit crunch. Meanwhile, Australia will report its employment statistics. Last month’s data surprised to the upside in the number of jobs, but a warning in the low number of hours worked. Analysts will be waiting to dig in to the official data for further proof of the Australian employment recovery.

With little data releases before then to guide it, the market will be eagerly awaiting the next ECB meeting scheduled for January 22. The pressure keeps piling on ECB chief Mario Draghi to launch a quantitative easing program, but the Germans are likely to make the program lower in impact if they get their way to not include sovereign debt with a low rating.

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