Recent US economic data offers few forex market clues

Recent US labour market data, published 5 April, didn't answer any questions about the pace of the slowdown in the American economy, and leaves the country’s central bank locked into inaction for the foreseeable future, according to a leading City analyst. 

Kit Juckes, Head of FX at Société Générale, told clients in an investment note there was nothing around to boost forex volumes, unless geopolitical developments have their say.

“Bond yields are lower and Asian equity indices are mixed as the week starts with unrest in Libya as a backdrop and Friday's UIS payroll data largely forgotten or ignored. The week ahead sees minutes for the March US Federal Reserve meeting, which surprised markets with its dovishness, and an ECB meeting at which it's too early to expect further action.

“And one way or another, Brexit will come to a head as the extended deadline for leaving with no deal or coming up with a good reason for an extension, approaches.”
The US payroll data show employment growth steady at 1.71% per annum, and Juckes said it is “still probably indicating that the peak is behind us but telling us very little about the pace of slowdown from here, and told us little.” 

Wage growth slowed slightly and is still best described as trending ever so slowly higher. If the Fed wants to see the whites of the eyes of the inflation monster before hiking, there is absolutely no pressure to act. 

“This week's CPI data are unlikely to change that. But on the other hand, there isn't yet any real pressure building for easier policy and the debate about where the economy is heading is unresolved. With that, the direction of the dollar remains very neutral. Volatility-buyers are not getting much help.”

Last Friday's GDP data showed UK output per hour falling 0.1% in the year to December. Productivity growth has averaged 0.3% per annum in the decade since the financial crisis, compared to nearly 2% in the previous decade. 

“This is one economic disaster that we can't pin on Brexit - productivity growth since the referendum has been no worse than it was in the run-up to it. A lot of the blame falls to the financial sector, which looked productive in the pre-GFC years because a cavalier attitude to risk (and leverage) made it appear so,” Juckes said. 

But that's small comfort in an economy close to full employment, where GDP growth is limited be labour force growth and productivity. Still, there's probably little impact on sterling, beyond pointing out that the levels the currency was trading at in the 2000-2008 years are very unlikely to be seen again. 

“In the meantime, Theresa May seeks some support in Parliament for a way forward that can help the EU grant a further extension in the Brexit process and unless she can concoct something early in the week, nerves will be pretty raw before long,” he added.

So where does the FX market look? “With oil reacting to the Libyan crisis, EUR/NOK and USD/NOK are still worthwhile shorts and with US/Chinese trade talks still underpinning commodities, we're happy to be short EUR/AUD too. And while USD/CHF is still going nowhere, I find shorts near parity much easier to hold onto than EUR/USD longs would be.”