Following on the more hawkish than expected FOMC statement in the prior week, the all-round positive non-farm payroll report released on Friday pushed expectation of a December rate hike by Fed to recent hike. Fed fund futures are now pricing in 70% chance of a December hike, up from 56% on Thursday and around below 40% a month ago. Dollar ended as the strongest major currency last week recording broad based gain. Dollar index jumped to close at 99.16, comparing to prior week's close of 96.91. 10 year yield also surged to close at 2.333%, highest since July. DJIA and S&P 500's responses to the jump in rate hike expectation were relatively positive as both registered slight gains for the week. Meanwhile, gold tumbled sharply to close at 1088.9 due to dollar's strength. Elsewhere in the currency markets, Aussie was the next strongest major currency as RBA sounded upbeat on economic outlook. Sterling tumbled broadly after more dovish than expected BoE Super Thursday.
To have a quick recap, the number of non-farm payrolls rose 271K in October, higher than consensus of 180K and a downwardly revised 137K increase in September. Private sector hiring rose 268K, the highest since last December, as driven by strong retail trade (44K) ahead of the holiday season. Average hourly earnings gained 0.4%, marking the highest since July 2009 and lifting the year-over-year growth rate to 2.5%. The Fed might feel more assured that inflation would gradually move back toward the Fed's 2% inflation target. The unemployment rate slipped to 5.0% from 5.1% in September.
The BOE voted 8-1 to keep the Bank rate unchanged at 0.5% with Ian McCafferty the sole dissenter proposing a rate hike. Yet, the message sent this month turned out to be more dovish than anticipated. The central bank now expects the first rate would begin later than previously suggested as UK's growth outlook might be somehow affected by slowdown in emerging market economies whilst inflation expectations in the short-terms are softened due to weakness in commodity prices. Also released today, BOE's Quarterly Inflation Report unveiled that the growth forecasts for 2015 and 2016 were revised, while inflation is not expected to reach its 2% inflation target for another 2 years with forecasts downgraded from this year through 2017. More in Super Thursday: BOE Surprises to Downside with Lower Growth and CPI Forecasts, Push Back in Tightening.
Despite strength in Aussie and tighter mortgage credit, the RBA left the cash rate unchanged at 2% in November. The central bank appeared less concerned over the global developments. As noted in the accompanying statement, the global economy 'is expanding at a moderate pace' and 'volatility in financial markets has abated somewhat for the moment'. It also remained aware of the Fed's potential tightening of monetary policy sometime in the future. Domestically, policymakers acknowledged 'moderate expansion' continued and business surveys suggested a 'gradual improvement in conditions over the past year'. Inflation was still low and should 'remain so, with the economy likely to have a degree of spare capacity for some time yet'. Policymakers forecast that inflation should 'be consistent with the target over the next one to two years, but a little lower than earlier expected'. More in RBA: Improved Outlook Warranted Unchanged Policy, Soft Inflation Leaves Room For Cut.
The minutes for BOJ's meeting in early October unveiled that domestic demand remained firm despite stagnant growth in exports and the economy in general. Policymakers agreed that the underlying trend in inflation would continue to improve and they pledged to continue implementation of QQE until the target inflation rate of 2% is stable. On global economic developments, the central bank, however, noted concerns over slowdown in China and other emerging market would eventually affect Japan's exports and economic activities. The members again voted 8-1 to continue the asset purchase program aiming to increase the monetary base at an annual pace of about 80 trillion yen. More in Dated BOJ Minutes Unveiled Concerns Over China's Slowdown
Dollar index surged to close at 99.168 last week and took out 98.33 resistance decisively. The development indicates that correction pattern from 100.39 has completed with three waves down to 92.62 already. And the strong momentum lifted the change of larger up trend resumption. This is also supported by the strong support by the rising 55 weeks EMA while 55 weeks MACD also turned above signal line. Initial bias remains on the upside this week for a test on 100.39 high. Break will confirm this bullish case and target long term fibonacci level of 121.02 to 70.69 at 101.79. Break will target 61.8% projection of 78.9 to 100.39 from 92.62 at 105.90. In case of retreat, we'll stay bullish as long as 96.63 support holds.
Regarding trading strategies, our AUD/NZD short was stopped out as Aussie rebounded on more upbeat than expected RBA. Our EUR/USD short wasn't filled as the pair recovered to 1.1105 but missed our entry at 1.1120. Dollar strength is expected to continue in near term and the question is what to buy dollar against. EUR/GBP recovered last week but stayed bearish. Thus Sterling was quite weak last week, we'd still prefer to sell Euro over the pound. EUR/JPY also stayed bearish even though lost some downside moment. EUR/AUD also lost some downside moment but was there was no change in the near term down trend. EUR/CAD also extended recent down trend with mild downside momentum. Hence we'll try to sell EUR/USD again this week, also on expectation of further build up to ECB's additional stimulus in December. As EUR/USD just took out 1.0807 support which might trigger downside acceleration. We'll just sell EUR/USD at market this week with stop at 1.0900. Initial target is 1.0461 low.