The past trading week was not easy for the world markets. Positive market behavior was based on the US Federal’s decision to start supporting the labor market by stimulating the real sector of the economy in order to create new job places with a definite and clear prospect of low interest rates. This news caused the growth of demand for the companies’ shares to appear and should’ve had potentially a noticeable negative impact on the US currency rate. However, there were none! Dollar suddenly began to receive huge levels of the growth support.
What is the reason for such dynamics?
In my opinion, there are two reasons for that. The first one implies the strongest technical oversold of the American currency during the previous 4 months. It could have continued, but the main alongside “market competitors” are rather weaker against the background of previously reduced interest rates, as well as the presence of all kinds of incentive measures. The second point is within a noticeable decrease in optimism about the prospects for more vigorous growth of the American economy, what after a spike in early summer began to deflate gradually. It seems that many investors began to estimate the Dollar as a safe currency. Still, the main reason that really began to support the dollar is a precise decision of the Federal Reserve to target average inflation at 2.0% or even higher in the short term.
At some point, the 2-year T-Note’s yield surged above the 10-year T-Notes, increasing the investors’ Dollar market expectations. It seemed that the new monetary policy of the US regulator would support the yields on government bonds. Such was clearly indicated through the numbers and would’ve stimulated the growth of the American currency. However, it then became clear that this was not entirely true and the yields fell to the levels prior to Jerome Powell’s speech aftermath.
How did the dollar react to the employment numbers in America?
A big disappointment for the markets was the publication of this week’s production data for both China, Europe and the US, bringing us back to the 2008 levels. Investors optimism was noticeably battered by the US non-manufacturing purchasing managers ISM data release on Thursday. The figures were not only worse than the forecast of 57.0 points, but also less than the July value of 58.1 points, showing an increase of only 56.9 points. This news caused a collapse in the US stock market on Thursday, what however did not make a noticeable impact to the dollar dynamics against major currencies.
The main event of the week was the US employment data release. The forecast assumed an increase in the number of new jobs by 1.4 million in August against 1.763 million in July. A decrease in the unemployment rate was also expected from the level of 10.2% to 9.8%. But the values of the indicators differed markedly – the number of new jobs came out at 1.371 million and the unemployment rate dropped significantly below the forecast to 8.4%.
The dollar didn’t show a clear reaction to this, swaying before the start of trading in the US. Its strength appeared at the trades opening and was fully supported by the strongest growth in Treasury yields. When the US opened up today, the yield on the benchmark’s 10-year Treasuries jumped by 8.86%.
thoughts and Conclusions
Summing up the week, I should note that the American currency managed to keep the upward trend, which may continue next week, ofc if all the circumstances and economic statistics indicate a slowdown in the pace of the US economic recovery.