Fx Impacted By Euro Banks
The Canadian dollar weakened sharply against most major currencies on Friday, after a surprise drop in Canadian employment for June.
By Peter Martin
Friday, July 11, 2014 - 00:00
June’s decline of 9400 comes after May’s robust 25,800 increase in employment, and is the second fall in the last three months of the Canadian Labor Force Survey. Digging into the details, the fall was driven by a large decrease in part-time jobs, while full-time employment actually increased by 33,500, meaning the actuality is not quite as doom-and-gloom for Canadian economic growth as the headline numbers suggest. Nevertheless, the data points to a weakening in the labor market in the second quarter, which could pose downside risks to growth and inflation, as Bank of Canada Governor Stephen Poloz has been warning. With this kind of slack in the labor market, it weighs in favour of dovishness at the central bank and that has been working to undermine the Loonie today. Just after midday in New York, USD/CAD was up 0.68% at 1.0721.
A big issue driving volatility yesterday was resurgent worries over the health of European banks, after debt problems for the Espirito Santo Financial Group emerged, a significant stakeholder in the Portuguese Banco Espirito Santo. The Bank of Portugal has said that Banco Espirito Santo requires no help with funding and that savers need not worry, but risk aversion continues to drive safe-haven assets higher today, albeit at a more relaxed pace than on Thursday. The euro slid 0.09% against the dollar, while USD/JPY fell 0.04%. The Japanese yen, often considered one of the safer currencies, rose against most commonly-traded currencies, in fact, as traders adopted a cautious approach as to whether the situation in Portugal might lead to broader contagion.
Nerves over Europe have overtaken concerns over the timing of when the Fed will choose to tighten monetary policy, although this may come back into focus next week when Fed Chair Janet Yellen delivers her semi-annual monetary policy testimony to the Senate Banking Committee.
Traders were hoping for further insight into this issue with the release last Wednesday of the minutes from the June FOMC meeting, but the minutes offered no clues as to when rates will be raised, offering only the vaguest description of policy decision depending ‘on the evolution of the economic outlook’. Interestingly, the minutes did detail how ‘several others’ of the committee harboured concerns ‘that persistent low inflation in Europe and Japan could eventually erode inflation expectations more broadly’, while a couple of committee members thought that action by the ECB and the Bank of Japan might aid inflation in returning to target.
The recent developments in Europe will be closely watched and could prove pivotal to forthcoming monetary policy; while the Fed’s apparent disregard of quite substantial improvements in the labor market has been interpreted as overly dovish in some corners, it now appears more prudent against this backdrop of possible ructions in Europe.
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