Friday’s employment situation data surprised on the upside and that was immediately reflected in the price of the dollar index (DXY), which tracks the greenback against a basket of six global currencies that are the euro, the Japanese yen, the pound sterling, the Canadian dollar, the Swedish Krone and the Swiss franc, and which rallied 0.76 percent, which was by the way its biggest one-day gain of 2017.
Technically speaking, it seems clear that the sudden upwards move of the dollar was for a good part helped by a sizable “short-covering” from one of the biggest short positions against the dollar we hadn’t seen in years.
Anyway, it could also be helpful to keep in mind that the dollar index (DXY) is down by about 10 percent from its top at the beginning of this year, but the DXY is still up by about 20 percent from where it was at the beginning of 2014.
Now, for the dollar to maintain its up-momentum it would be necessary that the market changes its interest rate pricing. The consumer price inflation (CPI) that will come out this Friday could give some direction.
For investors who try to decipher where the dollar could be headed over the median term, there are two scenarios:
The dollar (DXY):
- could slip further to the 85 price zone, or
- could rebound back above 98 price zone.
In my opinion, both scenarios are possible and a lot will depend of the political developments in the United States. We should not overlook the fact that in September we have the debt ceiling saga that could, I’m not saying will, damage, among other things, the dollar.
Meanwhile, I don’t think that the July jobs report will change anything to the Fed’s intention to start, rather sooner than later, its rate-hiking cycle. No doubt, and again, technically speaking, we are at full employment and as an investor one should better keep in mind that the 209,000 gain in payrolls is about the double of what is needed for being sufficient to provide the necessary jobs for the new entrants in the labor force.
In December 2015, Fed Chair Janet Yellen, who was speaking before Congress' Joint Economic Committee, said in a question-and-answer session: "To simply provide jobs for those who are newly entering the labor force probably requires under 100,000 jobs per month," with anything above that helping "absorb" those who are unemployed, discouraged or had dropped out of the labor market."
At that same occasion, Yellen also said that the United States may be "close to the point at which we should be raising" a benchmark interest rate that has been held near zero since the onset of the financial crisis seven years ago.
So, and notwithstanding wage growth remained soft in July, the 4-month annualized growth rate came in for July at 2.8 percent, which, and this is important, gives support to the Fed’s view that the recent softness in wage growth was transitory.
For all that, I still think that at the next Federal Open Market Committee (FOMC) meeting that will be held on September 19-20 the Fed will announce the slow start of the shrinking of its balance sheet and that in December we’ll have another rate hike.
I know that’s not the view of the market who, generally speaking, would prefer lower for longer…
Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.
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