US employment report the prime focus for Friday…
…but unlikely to disturb the slightly negative USD tone
CAD strength unlikely to be hampered by a weak April employment report
JPY still looks due for a catch-up rally
GBP choppy after the BoE meeting, but risks on the downside
The US employment report will be the focus on Friday, although in reality the market has not been particularly sensitive to data of late, and it will need something a long way away from expectations to have a significant market impact. Even then, a lot would be put down to volatility, and as long as the market retains its current perceptions of Fed intentions the impact of the numbers is probably not going to be large. We expect a rise of 850k, 780k in the private sector, similar to respective March gains of 916k and 780k. This is slightly below market expectations, but not enough to make a major difference. That March’s rise was inflated by improving weather will weigh against an improving underlying April picture. We expect a 0.1% increase in average hourly earnings and a fall in unemployment to 5.7% from 6.0%, a slightly larger fall than the market anticipates.
The USD fell a little against the EUR on Thursday, and also is starting to trade slightly soft against the JPY, while the CAD continues to perform strongly. The AUD is being held back a little by the China/Australia spat, and also by some slight deterioration in risk appetite, which is also having a modest negative impact on the NZD, NOK and GBP, though the CAD has escaped harm helped by the more hawkish perception of the BoC. In general, though, there is a mild negative feel to the USD underpinned by softish US yields and the persistence of the dovish Fed stance, while the record US trade deficit reported this week highlights the natural flows that will continue to tend to weaken the USD in the absence of financial flows in the other direction. An as expected employment report is unlikely to disturb this general USD negative bias, although at this stage it remains quite mild. While the EUR and particularly the CAD and CHF strengthened on Thursday, we would now see the JPY as having the most potential to gain, with little case for EUR/JPY to be trading at the highs if risk premia are rising slightly, and EUR/CHF declines generally signaling a similar move in EUR/JPY.
For the CAD, the fact that the Canadian employment report is expected to show some weakness in April looks unimportant given that the weakness is a consequence of COVID lockdowns that aren’t expected to have an extended impact. The hawkish BoC stance is seen as the more significant issue, while a firm oil price is also helpful. However, it is noticeable that the CAD has outperformed the NOK in the last few weeks in the battle of the oil sensitive currencies, and is approaching its highs for the year. In a USD negative environment this looks unusual, and it may be time for the NOK to play some catch-up.
GBP was choppy after the Bank of England meeting on Thursday, initially falling back on the announcement of no changes in policy, but then rallying as the Bank indicated it would start to slow the pace of gilt purchases in view of the expected sharp economic recovery and the need to reduce the pace to preserve the use of asset purchase facility into year end. But the recovery didn’t last as GBP succumbed to a generally more risk negative market tone in the European afternoon as the US tech sector sold off modestly. In reality, there wasn’t a lot of news in the Bank’s announcement from a policy perspective. While they upgraded growth forecasts for 021, they reduced the 2022 forecasts so the net effect was minimal. They also reduced their inflation forecast, primarily because they reduced their estimate of the level of “scarring” on the supply side of the economy, which also reduced the inflationary impact of any given rise in demand. But these estimates are all by their nature very uncertain at this stage, and for now we would tend to take the view that as one of the weakest economies through the pandemic, the UK remains one of the least likely to be early tighteners of monetary policy. That being the case, we would expect to see GBP trade slightly on the back foot, especially if the environment turns less risk friendly.