Prior to today, the dollar had been faring well this week on the back of an apparent divergence in monetary policy between the US and other leading economies.
By Peter Martin
Saturday, November 8, 2014
US economic data is in stark contrast to Europe and Japan’s struggles with anemic inflation and tepid growth, which leading many to speculate that the Fed will move to tighten policy relatively soon, while other central banks are still in a phase of fresh stimulus. The Bank of Japan’s recent move to expand stimulus and yesterday’s press conference with ECB President Mario Draghi, in which he stressed the central bank’s unanimous commitment to combatting below-target inflation, seemed to underscore this line of thinking.
Developments on Friday have served to raise questions about how close the Fed really is to hiking rates though. Probably the biggest economic release of the week was this morning’s non-farm payrolls report and, unfortunately, it surprised to the downside. Payrolls grew by 214,000 in October, quite a robust pace that is broadly in line with the average monthly gain of 222,000 seen over the past 12 months, but it was some way short of expectation, with the consensus estimate pointing to an addition of 240,000 jobs.
September’s payroll change was revised up from +248,000 to +256,000, and August from +180,000 to +203,000, which offsets to some degree the softness in October’s result, and the unemployment rate edged down from 5.9% to 5.8%, but pay growth remains anemic with average hourly earnings creeping up just 0.1% (+0.2% was expected) after no change in September. In summary, the labor market is still improving, but not at a sufficient pace to force the Fed’s hand into tightening.
Alongside the slightly soft labor data, Fed Chair Janet Yellen spoke at a conference in France today and her comments were far from hawkish. ‘Central banks need to be prepared to employ all available tools, including unconventional policies, to support economic growth and reach their inflation targets," said Ms Yellen. ‘Given the slow and unsteady nature of the recovery, supportive policy remains necessary.’
Speaking more specifically about the Fed normalizing monetary policy, she said, ‘the Federal Reserve will strive to clearly and transparently communicate its monetary policy strategy in order to minimize the likelihood of surprises that could disrupt financial markets, both at home and around the world.’
By mid-afternoon in New York, the euro had strengthened against the dollar by 0.51% to 1.2438, paring its losses for the week. EUR/USD is now around 0.7% lower for the week.
In contrast to the US, Canadian jobs grew at a faster-than-expected pace in October, helping the Loonie to advance against the US dollar. Canada added 43,100 jobs in October, with gains led by full-time positions in the private sector. Following on from the huge 74,100 jump seen for September, the Canadian labor market seems to be in rude health lately and this will raised expectations for momentum in the final quarter. USD/CAD fell 0.84% to 1.1327.
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