The Trade Week Ahead – Can’t Buy a Friend


The USD just can’t buy a friend currently – DXY is under immense pressure as EURUSD and USDJPY take off in either direction.

(Source Bloomberg)

This chart shows EURUSD to USDJPY to DXY. EURUSD is up over 20% in the past year and as we have been discussing for the past month punched through $1.25 and did with ease. While the JPY is seen safe-haven buying and has pushed to 106 (and testing this level strongly). DXY at 88 looks friendless from all angles.

The macro reasoning for EURUSD was the European GDP figure from last week – Europe’s economic renaissance is a signal that the ECB’s actions over the past five years is finally creating some traction but more importantly that global confidence is filtering into actual economic returns. The preliminary read of 2.7% year-on-year (YoY) help the EUR punch on form an indices point of view – the global economic flow throughs will likely come the second half of 2018 (China and EM that service Europe)

The second part of the USD story (DXY as well) was US CPI. Core CPI hit 1.8%, beat the street by 10bps and was a 10bps increase on the previous month’s – In short, the US is on track to reach its second mandate.

The 20bps gap to its 2% mandate can easily be closed if average hourly earnings increase continue to ramp up like it did in the January Non-Farm Payrolls (NFP). Considering the fiscal stimulus that was signed off on last week -The inflation outlook is bright.

What was interesting and could explain the USD’s friendless trading was the US 10-year hit a new 4-year high of 2.94% on the release of the CPI numbers. That figure is a good 5bps higher than the 2.89% level that has been suggested as a trigger point for the recent market volatility that saw the DOW drop 1500 point in a session.

The sell-off in the bond market needs to be seen for what it is – the market’s increased belief the Fed will not only increase rates further in 2018 but the speed and amount rate hikes forecasted may also occur at a faster rate. However, from a currency perspective over time this will be an attraction.
The Inflation growth debate is one that will rage for all of 2018 and beyond.

Looking to the macro trades of this week and it’s all about Wednesday’s wage price index.

The RBA has singled out the importance of the wage on Australian inflation – as they have linked increased wages to increases in consumption and pricing. Yet wage growth hit a record low in the June quarter last year and only marginally improved in the September quarter.

Below is the last wage price index print with Australia’s current core inflation level superimposed as the dashed line.

(Source: ABS)

The chart shows very clearly that private sector wage growth is very weak and is currently only 10 basis points above core inflation – the more cynical view is that private sector wages are actually even with headline inflation at 1.9%.

The chart also shows that without the public-sector, trend growth would be materially lower than its current 2%. However, you look at the latest figure figures – the downward trajectory of wage growth has been a phenomenon that has been intact since the 2012 June quarter which doesn’t look like abating.

(Source: AMP Capital)

Furthermore, the chart above is an illustration of why underutilisation will be one of the biggest drags on wage growth going forward. Underemployment has remained near record highs – (this is the amount of people that want to work more hours or actually finding work) for wage growth to see a material change underutilisation (which is underemployment and unemployment combine) needs to fall dramatically – something that won’t be happening any time soon and only then will the RBA entertain changes to monetary policy. Leaving the AUD with a structural weakness over the medium term.

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