FX Technical Analysis (2016-11-07)

by James Chen

Fundamental Recap: Mixed Jobs Report Shifts All Focus to Election Tuesday

Like the preceding two months, the US jobs report for October that was released on Friday disappointed expectations. However, the reading still fell within reasonable range of forecasts, showing a relatively solid and stable employment picture that is unlikely to change the expected interest rate trajectory of the Federal Reserve. In addition, a few upside surprises in the report helped to reinforce both the current steadiness of the US economy and the rationale for a December Fed rate hike. Now that the jobs report is out of the way, though, the one immediate event that could very well impact the Fed’s interest rate considerations, as well as the direction of the financial markets, is the US presidential election coming up on Tuesday.

The headline non-farm payrolls employment change for October came out at 161,000 jobs added against 175,000 expected. This fell on the lower end of the 160,000-180,000 range that we projected prior to the release. As noted, however, one of the upside surprises occurred in the headline release – namely, September’s reading that came out in early October was revised sharply up to 191,000 from its original disappointment of 156,000. This raises the average of the past three months up to 173,000 jobs added per month, which can certainly be seen as a strong showing for the recent employment landscape.

The unemployment rate ticked down to 4.9% in October, as expected, from September’s reading of 5.0%. But the second upside surprise was perhaps the most positively impactful of the entire report – October’s average hourly earnings, a key measure of US wage growth, was surprisingly better than expected at +0.4% against prior expectations of +0.3% and up from September’s +0.2%. This represented a highly substantial increase in wages that will likely play a pivotal role in Fed decision-making for December, as well as potentially help provide some support to equities and the US dollar.

With that being said, however, market reactions to the report were both mixed and muted immediately after the jobs release, largely due to other pressing factors currently dominating the markets. One of these factors was the prolonged slide for crude oil, which continued Friday due in part to exceptionally high US crude oil inventories reported earlier in the week, doubts about the viability of a proposed OPEC deal to cut oil production, and the latest reports of possible squabbles between major OPEC members, Saudi Arabia and Iran.

Of course, the most pressing condition on the immediate horizon lies in the US presidential election to be held on Tuesday. Despite the abrupt announcement more than a week ago of a new FBI probe into Hillary Clinton’s past emails that has damaged her presidential campaign, Clinton appears to be holding on and retaining a modest lead in general polling and Electoral College projections. It’s come down to a bitter fight for several pivotal swing states and still-undecided voters, which both Clinton and Donald Trump have been desperately trying to sway. As it currently stands, the contest is very close, and any new developments could easily tip the balance either way.

In the past week as the race has tightened considerably, fearful stock markets and the US dollar have been heavily pressured, while safe havens like gold and the yen have been boosted on the unpredictable prospects of a potential Trump victory.

In the event of a Clinton win, equities and the dollar are likely to rise as the markets breathe a big sigh of relief, and gold should lose its shine as the uncertainty fades, at least in the initial stages. All of that could quickly change, however, as the reality of Clinton’s economic policy stances could ultimately help drag down the markets. In the event of a Trump win, it is almost inevitable that market volatility will increase considerably due to the sheer uncertainty that Trump currently represents, both politically and economically. This impact could last for months, towards January inauguration and beyond, potentially pressuring both stocks and the dollar to correct and pull back significantly further.

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