© Michael Gapen
|
In our view, the labour market has rebounded sharply since mid-year. Earlier this year we were worried that the labour market was sending recessionary signals, but that was through the main employment report and since then the three-month average increase in payrolls has been 232,000, which is a very strong number and indicative that the economy remains in a recovery phase. So, as we look ahead to the September employment report, we in consensus do expect another good month of hiring and therefore we expect it to keep the Fed on track for a rate hike later this year, although some of this will be dependent on the details of the report: what happens to the unemployment rate, what happens to wages. Thus, we need a little more than just strong employment, perhaps to keep the Fed into action. If the number is below consensus expectations, I would say one of two things could be happening. I mean there is a group of people, who believe that employment growth should slow as we get into the neighbourhood of full employment. And then, also September tends to be a weaker period from a seasonal perspective, where hiring in August and September seems to get pulled lower relative to previous months for seasonal reasons and not indicative of underlying trends. That is why we have to look at the details but the main point is that the labour market has rebounded since the middle of the year, which gives us confidence that the economy remains in a recovery phase. More persistent weakness in employment would signal something worse, so we would have to judge the strength of the number against those views. We take our signal about whether the economy is in a contraction or an expansion primarily from the labour market and right now the bulk of the labour market data says that everything is fine.
What are your forecasts for USD/CAD and EUR/USD for the end of this year?
We expect USD/CAD to be 1.34 and EUR/USD to be 1.08. The major drivers, at least to the Dollar in the near-term, are probably mainly surrounding the Fed policy. So, I think the expectation is from markets that the Fed will raise rates by the end of the year. Moreover, we do expect the BoJ to do some additional easing later this year and we expect the ECB to recalibrate some of its asset-purchases, but we do not expect major moves into negative interest rates in the Euro zone or obviously in Canada, giving where they are as well. So, I think yield differentials are moving in favour of the US Dollar and therefore we would expect some appreciation of the Dollar broadly against other currencies.