• US August non-farm payrolls +187K vs +170K expected
• US August ISM manufacturing PMI 47.6 vs 47.0 expected
• Canada Q2 GDP -0.2% vs +1.2% expected
• Baker Hughes US oil rig count unchanged this week
• Atlanta Fed GDPNow steady at 5.6% after ISM manufacturing report
• US July construction spending +0.7% vs +0.5% expected
• Fed’s Mester: Inflation still too high, but sees progress
• US August final S&P Global manufacturing PMI 47.9 vs 47.0 prelim
• Canada August S&P Global PMI 48.0 vs 49.6 prior

Markets:

• Gold flat at $1940
• US 10-year yields up 8.8 bps to 4.18%
• WTI crude oil up $2.25 to $85.88
• S&P 500 up 0.1%
• USD leads, CAD lags

The initial market reaction to the non-farm payrolls report was about what you would expect — USD selling, bonds bid — but then it got complicated. The initial moves reversed and bonds sold off, leading to a strong bid in the US dollar. The moves grew increasingly aggressive with USD/JPY slumping to 144.45 then soaring to 146.16 — nearly 180 pips.

The dollar roared elsewhere as well with EUR/USD tumbling to levels just above the August lows. That wiped out what had been a promising rally this week for the euro bulls.

Cable rose to 1.2713 on the US jobs report then dropped 1.2580 before trading sideways into the US long weekend.

The only currency with a relatively straightforward move was CAD as a poor GDP report sank the loonie initially and then USD strength did the rest. The result was a 90-pip rise in USD/CAD to 1.3600, also wiping out some decent progress that had been made earlier in the week.

The big question left to answer is: Why the sudden jump in bond yields on what was a dovish jobs report? Some pointed to modest strength in the ISM survey along with the energy price rise but that’s hardly compelling. Other talk centers around rate lock selling and I can’t help but wonder if Chinese bond sellers were looking for liquidity. There isn’t an easy answer and the long weekend along with the turn of the calendar were also cited.

The lack of a clear explanation puts the US dollar rally on a shaky foundation. We’ll have to sort it out next week — enjoy the weekend.

This article was written by Adam Button at www.forexlive.com.

Closing changes:

• S&P 500 +0.2%
• DJIA +0.3%
• Nasdaq Comp flat
• Russell 2000 +1.0%
• Toronto TSX Comp +1.2%

Weekly:

• S&P 500 +2.5%
• DJIA +1.4%
• Nasdaq Comp +3.2%
• Russell 2000 +3.6%
• Toronto TSX Comp +3.5%

There were some larger divergences with energy leading the way today behind a 2.0% rise in the XLE ETF. Banks were also strong to help pace the gain in the Russell 2000.

The weekly chart sets up a showdown with the July high but we’ll have to wait until Tuesday as North American markets are closed for a holiday.

This article was written by Adam Button at www.forexlive.com.

The September dot plot is always the most-interesting one of the year because it’s the closest thing to forward guidance that the FOMC offers.

Officials are required to place a year-end dot but there are only two meetings left so it basically says what they expect to happen in the next two meetings. Now that’s far from set-in-stone but with Sept hike odds down to 7% after the non-farm payrolls report, it will offer some intrigue at the Sept 20 decision.

Here’s what the fixed income team at BMO is looking for (note that the current rate is 5.25-5.50%):

In terms of the
looming dotplot revisions, we anticipate the 2023 funds estimate will remain
unchanged at 5.6% (implying a 5.75% upper bound) and 2024 will be nudged higher
to 4.9% (signaling 75 bp of cuts next year). These expectations are relatively
consensus at present and predicated on the August CPI report confirming this
summer’s benign inflationary backdrop.

So the thinking is that the dot plot will still signal one more hike because that will be easier for Powell to walk back later than it would be if no hike was signalled and they had to later reverse course and indicate a hike.

This article was written by Adam Button at www.forexlive.com.

Goldman Sachs maintains its recommendation for a short position in EUR/CAD with a target of 1.42 and a stop at 1.50. The rationale behind this trade is largely based on the resilience of the U.S. economy and the potential for upside in the Bank of Canada’s monetary policy.

Key Points:

• Strategic Focus: Goldman Sachs is focused on tactical, relative value opportunities that are likely to be resilient against further volatility in the U.S. dollar.

• Pair Selection: EUR/CAD is the preferred G10 currency pair for this strategy.

• Resilient U.S. Economy: The U.S. economy continues to show resilience despite various market uncertainties. This strengthens the CAD as it is closely tied to the U.S. economy due to trade relations.

• Bank of Canada’s Upside: There is scope for the Bank of Canada (BoC) to tighten its monetary policy further, which would benefit the Canadian Dollar (CAD).

• Target and Stop: The firm is targeting a move towards 1.42 in the EUR/CAD pair, with a stop at 1.50. This implies a negative view on the Euro relative to the Canadian Dollar for the period ahead.

Implications:

For Traders:

• Trade Structure: Those interested in following Goldman’s guidance might consider entering a short position in EUR/CAD, keeping an eye on the target and stop levels.

• Risk Management: Traders should be cautious of the risks involved, especially considering the various global macroeconomic factors that can affect currency valuations.

For Policymakers:

• Monetary Policy: The positioning suggests an expectation that the BoC may be more hawkish in its monetary policy compared to the European Central Bank (ECB), which may influence rate decisions.

Conclusion:

According to Goldman Sachs, the EUR/CAD pair offers a high-conviction short opportunity mainly based on the strong U.S. economy and the potential for hawkish monetary policy from the Bank of Canada. Traders interested in tactical, relative value plays might find this analysis and the subsequent trade idea valuable. However, it is crucial to consider risk factors and keep an eye on macroeconomic indicators that may affect the trade.

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This article was written by Adam Button at www.forexlive.com.

Monday is Labor Day in the United States and Canada so the stock, bond and futures markets will be closed while the FX market will be severely thinned. The economic calendar is bare and I wouldn’t expect too much drama.

This article was written by Adam Button at www.forexlive.com.