After a week when little other than politics has been ‘running’ the currency and rates markets, we expect more of the same but with the (now) backdrop of tier one data in the US to look to towards the latter end of this week. US payrolls is something which will be put on the back-burner as traders and investors alike size up the reaction to the Senate vote on the tax (cut) bill, which will be exacerbated by the retraction of the ABC story on Michael Flynn. The initial release on Friday reported the former national security adviser was ready to testify that Donald Trump had directed him to contact the Russians whilst a running candidate, but this was corrected to president elect which is standard procedure in foreign policy. The reporter, Brian Ross has since been dismissed by ABC, much to the satisfaction of the president, who continues to fight the good fight against fake news.
There will in all likelihood, be many more twists and turns, and no doubt more news – fake or otherwise – but next week will likely see US equities testing higher again, followed by the carry trade, but to a lesser degree. USD/JPY took a sharp downturn from near 113.00 levels, before dip buyers contained the sell off to the mid 111.00’s, and ending the week above 112.00 is likely to see a return to the highs before the market then starts to evaluate the effective gains of the tax cut bill, which has yet to meet agreement between House and Senate. The president expects to sign off this legislation by year end.
Back to the economy, where we will need to see continued improvement in order to underpin the 3 Fed hikes anticipated next year, and US factory orders on Monday kick off the week, followed by the ISM non manufacturing indices on Tuesday. Then it’s all eyes on the Nov payrolls report on Friday, where the consensus is for a 200k rise in the headline number, but hourly earnings seen tailing off from the 0.5% seen in Oct. We continue to see 2.50% capping 10yr yields, and as a such, the upper end of the USD/JPY range looks even less likely to exceed 115.00. Japanese GDP for Q3 due out on Thursday, but at 1.5% expected, is hardly going to light the fire under the JPY. Growth is picking up pace however, and provides food for thought further down the line when considering longer term (JPY) undervaluation.
This post was published at Zero Hedge on Dec 3, 2017.