Published on Friday, the employment report led to a decline in the dollar, which, by the way, was short-lived. The number of new jobs in October was 261,000, which is slightly worse than forecasts. However, the indicator for September was revised upwards, and the unemployment rate was unexpectedly reduced to 4.1%.
The employment report did not lead to a reassessment of the outlook for the rate - investors are still convinced that in December the FOMC will take another step towards the normalization of monetary policy. Moreover, the probability of another hike in March 2018 has surpassed 40%, which is a sign that the market is confident the US economy will cope with a new cycle of tightening.
At the same time, the employment report failed to leave a clear impression and showed that there is a risk that the market does not entirely appreciate. Yes, the actual pace of creating new jobs in the last two months was around the level of expectations, and the decline in the unemployment rate seems like a pleasant bonus. Focus will be on the fact that inflation expectations could be under pressure, as the current trend in terms of growth in the average wage will not contribute to growth, but instead to a decrease in inflation.
The graph below shows that two indicators of the health of the labor market, particularly, the average wage and the proportion of the labor force in the total population, are quite well correlated for at least the last 10 years, with any peak in the second indicator for several months. In general, it is ahead of the peak in the first. In other words, a significant decline in labor force participation to 62.7% to a 13-month low indicates a high probability of a drop in the average wage growth rate from the current 2.4% in the next few months, which will inevitably contribute to the development of deflationary sentiments.
Therefore, the dollar is still on a rather unstable growth path, but there are still few reasons to doubt that this growth will continue.
On Thursday, the Republicans submitted a detailed plan to the Congress regarding the changes in the tax code, which will play the role of breaking the trend of low incomes and promote consumption growth. Taxation of personal incomes has been simplified. Standard tax deductions have been sharply increased, which will raise real incomes of the population. The tax rate for corporations will be lowered from 35% to 20%, this is the largest reduction in taxes in American history, from 39.6% to 25%. The minimum rate for small businesses is reduced, and most importantly - taxation of foreign assets is significantly simplified, which, according to the idea, should contribute to the repatriation of capital and also increase the attractiveness of US assets.
In the event that the bill is passed without significant difficulties, the Congress will certainly contribute to the growth of demand for the dollar.
On Thursday, another long-awaited event took place: US President Trump asked the current head of the Federal Reserve, Janet Yellen, to resign and then appointed Jerome Powell to replace her. It is believed that Powell is inclined to continue the current policy of the Fed. The market news regarding Powell's appointment was favorably received, which was reflected in the new wave of growth in the blue chip index Dow Jones and also contributed to the overall positive outlook for the dollar.
Published on Friday, the CFTC report expectedly showed that speculative demand for the dollar continues to grow. The Canadian and Australian Dollars began to take their positions, the sharp decline in the Swiss franc pulled back, while speculators of the euro also assessed the pessimism. The market seems to agree that the dollar, after a long fall since January 2017, is finally beginning to regain its initiative, and therefore, in the coming week will move forward under the sign of its dominance.
The material has been provided by InstaForex Company - www.instaforex.com