December Fed Rate Increase on Track Despite Weak NFP – US Election Coming up

Last week finished on a bad note on the backdrops of election jitters and a US October employment report, which disappointed the market slightly. Equity markets closed in negative with the MSCI World down 1.8% last week. US equity markets on Friday saw a 0.2% drop in both the Dow Jones as well as the S&P500, where Consumer Non-cyclicals and Energy pulled the index lower. The markets have in general been in bullish mode as long as Hilary Clinton was ahead in the polls, but tension has increased as Donald Trump advanced, sending risk off (as well as the Mexican peso in FX markets) and investors favoured safe haven assets, leading to an additional increase in gold prices, closing above 1,300 for the first time since early October.

Friday’s US October Job Report was a mixed affair showing an overall slowdown in growth and pickup in inflationary pressure. The Nonfarm payrolls came out at 161k vs. 175k expected, unemployment rate falling 0.1%pp to 4.9% as expected, but the hourly earnings picked up to 0.4% from 0.3% exp. Participation rate was 62.8%. The data from the employment report have reduced bets slightly for a Fed rate hike on December 14th to 66.8% from 71.5% on Thursday, meaning that the path is still set for a 25bp hike.

US Nonfarm Payrolls vs. quarterly average (Source: Reuters)

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Canada released employment figures at the same time as the US October job report, showing a positive development in the Employment Change, coming out at +43.9k against expectations at -10k. Unemployment rate was unchanged at 7% as expected. USDCAD rose initially on the release, but fell after finding offers around 1.3465 and closing the week on a negative note with a weekly doji, indicating a lack of direction and potential pullback in the coming week.

USDCAD Weekly

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On Monday, the US Dollar is back in focus and following news that Hilary Clinton will not face criminal charges related to her using a private email server, risk is on and the Greenback is rebounding ahead of the US election on Tuesday. USDMXN is down almost 2% on the news and European stocks are up around 1.5% on average with the Italian FTSEMIB leading the gains, up 2.2% in the time of writing.

USDMXN Daily

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Until the end of the US election on Tuesday, we expect market action to fade as investors are awaiting the result and we recommend investors to reduce position sizes or use options in maximising returns over the US election. Many brokers have increased margin requirements in order to protect clients (and themselves) and so have we at Tier1FX. Please see the recent change here: http://www.tier1fx.com/en/trading-accounts/trading-conditions-execution/

 

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