The reaffirmed optimism that the Federal Reserve will be raising interest rates at some point this year following another strong US Non-Farm Payroll led to the USD rallying throughout the remainder of trading on Friday. The strengthening USD demand also spelled bad news for Gold bulls with the metal being punished and declining by $40 to $1228, its lowest valuation since the shock from the Swiss National Bank (SNB) last month.
The concerns that were beginning to emerge regarding US interest rates expectations being pushed back beyond the second half of the year have basically been eased following the employment report, with this meaning appetite towards the USD amongst traders is returning. Strengthening USD demand wasn’t only restricted to Gold coming under punishment, with the USDJPY extending to a near-one month high at 119.215.
However, the pair has already pulled back to 118.725 at the time of writing following trade date from China overnight rekindling concerns over economic momentum slowing down. On an annualised basis, imports to China declined by a whopping 19.9% with reduced domestic momentum continuing to be seen as the main catalyst behind a slowdown in overall economic growth. The forecasts for the import data was a 3% decline, so the figure being unexpectedly announced six times worse than expectations is likely to trigger renewed pressure on the People’s Bank of China (PBoC) to implement further economic stimulus measures beyond the reserve ratio requirement cut late last week.
JPY attractiveness as a safe-haven asset may not be over yet, with the latest inflation reading from China scheduled to be released in the early hours of Tuesday morning. China inflation levels are already around five-year lows but with fresh concerns over domestic momentum slowing down and the price of oil continuing to fall to new lows in January, the downside risks for the inflation reading to be confirmed lower than last month are significant. This could once again lead to JPY strength, while also pressuring the AUD and possibly Crude Oil. Oil would be at risk to the China inflation readings because as one of its largest importers, any indications of economic momentum slowing down could also lead to reduced demand for the commodity pressuring its price.
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Although Brent and WTI were both resilient to bearish movement after the USD rallied following the US jobs report, each have commenced the week by moving slightly lower. I do not think this is a coincidence with weak China trade data being released overnight and there are still some risks for the commodity ahead. The aggressive oversupply issue has not changed at all, with US Crude Inventories continuing to rise and Russia announcing its own output will increase slightly this year. What the unexpected rally did show us is that potential buyers remain very much interested in purchasing the commodity, and ready to pounce on whispers of less production. The problem for the bulls is that less production needs to actually be noticed before the price can bounce significantly higher.
It has to be said that the GBPUSD was an unexpected advancer last week with the pair benefitting from USD softness in the days leading to the US jobs report being announced and all three of the UK PMIs (Construction, Manufacturing and Services) coming in higher than expected. This provided traders with some comfort that the UK economy has commenced the year with robust momentum, however the pair has already dipped lower since then. This is coming as no surprise bearing in mind the GBP faces a major downside risk in the form of the Bank of England (BoE) inflation report being released this week.
It is no hidden secret to anyone that the BoE holds extremely strong views on inflation with these having strengthened further following the UK economy encountering unexpected deflation risks after the collapse in oil prices. UK inflation levels have already fallen to a historic low at 0.5% following the downfall in the price of oil, and with the commodity having made new lows in the month of January, the inflation reading for February is likely to be even weaker. This also means the BoE’s already-strong views on inflation are likely to become even stronger, with the Central Bank likely to repeat the UK inflation risks when the inflation report is announced this week.
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