Non-Farm Payrolls Remain Strong Throughout 2016

January 7, 2017
non-farm payrolls

The new year started like any other beginning of the month. The first week is always about the Non-Farm Payrolls and everything else is secondary. However, this time, the NFP didn’t have much impact on prices. The majority of the major pairs like EURUSD & USDJPY started traveling already on Monday. The jobs report itself wasn’t much of a surprise.

NFP came in slightly weaker than expected but we had plenty of clues that it might happen. First off, the ADP-NFP came in lower than expected. Secondly, the ISM-Non-Manufacturing report revealed that the employment component dropped from 58.2 to 53.8. These two clues were enough to be slightly cautious heading into the actual NFP release.

Regardless of the fact that the Non-Farm Payrolls missed their target (178K), the actual figure was still solid. U.S. labor market is still strong and keeps on growing. The only issue that remains is the labor force participation rate. That one still remains near the 63 percent (62.7). Back in 2006, the index was slightly above 66%, so in other words, there’s quite a lot of ground to cover.

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Dollar Rally

The demand for the U.S. dollars increased significantly after the U.S. presidential elections. The moment it became clear that Donald Trump will become the next president of the United States, the investors started to re-positions themselves. However, the entire change in the overall sentiment has largely been fueled by expectations.

As we all know, Mr. Trump promised to make America great again. Among his other plans, he promised to cut taxes and boost government spending. These two promises were enough for the majority of investors to start buying U.S. dollars and stocks. The questions that remain on the table, is how quickly those promises will be fulfilled and how effective they’ll prove to be.

If, for whatever the reason, those two vows made by the President-elect, should take longer than expected to be implemented, the U.S. economy may actually suffer. The problem is, of course, the exchange rate of the U.S. dollar which is inching higher against most of its counterparts. A higher dollar will have an effect on exports and hence on the overall economy. And if there should be a delay in Trump’s fiscal plans, then we could see a small hiccup in the U.S. economy.

The FED is Watching

Federal Reserve is monitoring the situation very closely. Chair Yellen even warned the Congress that new fiscal stimulus could have inflationary consequences. Of course, it’s not even certain that Trump can deliver his fiscal plan because some members of the Congress (or Senate) may not back a scheme that would boost U.S. budget deficit.

Nevertheless, the FED is clearly ready to act and ideally we should see three rate hikes this year. In theory, it is possible but if Trump’s fiscal plan should fail, then the FED may start scaling down their views. According to some economists, the current dollar rally may affect the overall growth rate by 0.5 percent and that is a huge figure.

1st Quarter of 2017

The first three months should give us a pretty good overview of what’s to come in the near future. By the end of the first quarter, we should have a clearer view on Trump’s fiscal plans, trade policies, and tax plan. If everything goes as investors hope, then we should take the FED’s rate views quite seriously but if not, then anything is possible.

Given the fact that the current dollar rally is based on expectations, we could see a sharp pullback in the greenback if it turns out that those expectations will not be fulfilled.

Bitcoin the Beast

Bitcoin has been making headlines since Christmas as the world’s most known cryptocurrency surged above the magical 1000 dollar line. In the beginning of 2016, bitcoin traded around the 450 dollar level. This means that its value doubled in just one year. However, if we go back even further, then it’s rather clear that those who bought it in January 2015, are even more pleased because on the 14th of January, that year, bitcoin was briefly even below 200$.

The sudden demand for bitcoin was triggered by India and China. The first one is trying to move towards a cashless society and the second one is busy implementing capital controls. Hence, the citizens of both countries are looking for alternative solutions and one of them is to use bitcoin.

Given the fact that bitcoin has been very popular in China for quite some time it’s rather likely that the demand there will keep on rising. The Chinese government is trying to stop or at least control the capital outflows from the mainland and hence it’s possible that PBOC will introduce further measures in 2017, to contain the problem.

Capital Properties FX
07.01.2017
Kaarel.

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