Written by Convera’s Market Insights team
Dollar hit by weakening labor market
Boris Kovacevic – Global Macro Strategist
The US dollar turned lower after a strong start to the week following weaker than expected labor market data. Investors remain laser focused on the upcoming non-farm payrolls report on Friday. However, the disappointing manufacturing PMI on Tuesday and lower job openings (July) on Wednesday have impacted markets significantly already.
Future markets now see a 45% probability of the Federal Reserve cutting interest rates by 50 basis points at the upcoming September meeting. Bond yields continued their consecutive two-week descent and the yield curve (2s10s) uninverted for only the first time since 2022. The Greenback fell against all its G10 peers in yesterdays trading session.
Job openings declined from 7.91 million to 7.67 million, falling to the lowest level since the beginning of 2021. Looking more closely into the report published by the Bureau of Labor Statistics, a closely watched metric by the Fed, the number of vacancies per unemployed worker, set a new three-year low. Big drivers of the decline in openings came from the government and the healthcare and trade & transportation sectors shedding vacancies. Both the number of people leaving their job and getting a new one have fallen below their pre-pandemic level to 3.28 million and 5.52 million.
Survey data such as the labor market ratio (jobs plentiful vs. jobs hard to get) from the Conference Board suggest another leg lower next month. The same tendency holds true for Tuesday’s PMI release. The new order vs. inventory leading indicator points to further pain for the manufacturing sector over the coming months. So, it will be the heavy task of the job report on Friday to restore confidence in the 25 basis point cut (vs. 50bp) and to strengthen the dollar. A disappointing job growth could spell trouble for the Greenback.
Euro recovers on soft US JOLTS
Ruta Prieskienyte – Lead FX Strategist
The euro capitalised on a soft US labour market print, climbing over 0.3% on Wednesday to $1.1085 against the US dollar and subsequently erasing its week-to-date losses. However, European stocks closed the day lower, with the STOXX 50 losing over 1%, tracking a global stock rout. Bonds rallied across the board, mirroring movements in US Treasuries. The front-end sovereign yield spread between Germany and the US narrowed to below 150bps, the smallest spread since May ‘23.
On the domestic macro front, market action was subdued and largely overshadowed by US developments. The Eurozone’s August services PMIs were revised lower to 52.9, down from a preliminary figure of 53.3. This marks the seventh consecutive month of expansion in the Eurozone’s services sector, at the sharpest pace in three months. However, this growth was heavily driven by an expansion in French services, likely boosted by preparations for the Olympic Games.
Elsewhere, several ECB speakers offered their views just before a week-long quiet period ahead of the ECB rate-setting meeting on September 12. Policymakers are widely expected to reduce borrowing costs again after a landmark cut in June. ECB’s Kazaks indicated that interest rates could be cut at the next meeting, joining his colleagues in endorsing further rate cuts after the ECB skipped action in July, while Cipollone urged that ECB’s policy risks becoming too restrictive. The case for another cut has been bolstered by inflation falling to its lowest level since mid-2021, though some policymakers have cautioned that the fight against rising prices isn’t over yet.
In the FX volatility market, significant attention is being placed on this week’s upcoming US NFPs report. Mild dollar weakness is expected to persist ahead of tomorrow’s report, especially if the US services ISM surprises to the downside. One-week EUR/USD implied volatility traded close to 7.5%, almost 150bps above realised volatility, marking an over two-month high.
The BoC cuts rates third time in a row
Ruta Prieskienyte – Lead FX Strategist
The Canadian dollar strengthened toward the low C$1.35 level against the US dollar despite the Bank of Canada’s dovish policy rate decision. Canadian bonds outperformed US Treasuries, with the 10-year yield trading approximately 2 basis points richer compared to the US 10-year, which showed little reaction to the BoC’s rate decision.
The Bank of Canada cut its policy rate by 25 basis points, bringing the overnight lending rate down to 4.25%, in line with market expectations. The central bank cited mounting economic concerns, with inflation edging closer to its 2% target. Preliminary data suggests downside risks to Q3 growth relative to the Bank’s July projections, while the labour market remains stagnant, with unemployment holding at 6.4%. This hints at the potential for further rate cuts in upcoming meetings. Governor Macklem also noted that sustained price pressures in the housing sector and specific services continue to keep inflation elevated.
Despite this, the Canadian dollar remains one of the more vulnerable currencies within the G10 sphere as yield differentials undermine its appeal. The Bank of Canada has already cut rates three times this year and is expected to continue easing, whereas the magnitude of the Fed’s easing remains largely uncertain. Overnight index swaps are currently pricing in an additional 58bps of cuts by the Bank of Canada by year-end, compared to 100bps expected from the Fed.
Euro, pound rebounding
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: September 2-6
All times are in BST
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
