Do you have a Plan, Mr Dollar?

In the light of expecting the actions taken by the American regulator, the following levels can be considered as target levels: EUR/USD 1.2100-1.2020, GBP/USD 1.5500-1.5350
The NFP that passed is trying to persuade the market that US dollar is still powerful. Even against the background of rate revision back in April 2015 hardly anyone could imagine such a strong growth of labor market information. Farm payrolls dynamics until November sent signals with regard to slowing down of values. Usually, after the first flash of quantitative indicators, quality indicators must provide main energy for further movement; however, is everything really so good or there is some inadequacy of information there?

Let's look at some values that are not very impressive: Average hourly earnings -0.4%, predicted 0.2%; Participation rate - 62.8% (equal to that predicted); Average weekly hours – 34.6 (same as predicted). Anyway, what produced such great growth? Let's look at sectors: private: +314K; government: +7K; production: +28K. At the same time, unemployment level stayed the same; the very fact of dramatic growth of the private sector makes us think of the combination: "Christmas - New Year - retail - part-time employment"; moreover, the present results of the "black Friday" showed an unprecedented decrease of buyers' interest. The adjustment of labor market information in January is obligatory, and only then we can assess the reality of success, although employment growth potential is far from being exhausted.

Besides, unemployment level among specialists (not lower than Bachelor) was only 3.2%, while competition for low-paid jobs was growing because of much publicized increase of authorities' loyalty to immigrants. That also eliminated one more negative factor for employment. Present-day prices for stock market assets grow much faster than consumer spendings. The oil-dollar combination does not blend into the positive picture quite well; that will become clear after the publication of corporate reports regarding profits and CAPEX data. It was assumed that ultra low-cost energy resources stimulate consumption to high spendings; however, in reality, people began to spend less, since decrease of prices for resources reflected the general tendency of the average consumer's standard of living decrease. Moreover, inexpensive oil does not contribute to tax deduction and does not add optimism to business. For the USA, decrease of oil prices causes critical contradiction with the problems in shale industry, which has actively developed during last several years, providing quality GDP growth and creating new jobs.

The existing Eurozone problems: absence of economic growth, slowing down of inflation, threat of Great Britain's pull out of the EU, disagreement with budgetary control lead to the fall of capital inflow to the UE peripheral countries and weakening of regional economies. Euro is rapidly losing its status of the reserve currency - "anti-dollar". The fall below the initial level 1.18 (only 5 figures left!) can cause its final destruction. Last week, a simple mentioning by Stanley Fischer of the coming adjustment with the wording "considerable time" caused the fall of the pair almost by the figure. The market still puts only the first FRS rate increase into prices, although the adjustment of industry rates and private indicators such as profitability of 2-year bonds must be carried out at least 3-4 months before that. If the labor market progress is retained, then judging by the FRS promises and according to the present futures for euro/USD, the first increase will be expected within the period from June to September of the coming year; that means that profitability increase will begin in March-April, which will cause a new surge of dollar growth. That will happen, of course, if the first quarter statistics does not deteriorate.

Rate increase will generate sharp contrast with the current German and Japanese monetary measures, since they go towards easing of money-and-credit regime, and the possible difference in the interest rate will make American assets more attractive, which will become another factor of strengthening the main currency. In the light of expecting the actions taken by the American regulator, the following levels can be considered as target levels: EUR/USD 1.2100-1.2020, GBP/USD 1.5500-1.5350 (but only after publication of the final British statistics), USDJPY, can reasonably aim at 123.50-125.00.

作者: Navsher Bartash,
ForexChief Currency strategist