US Dollar Losses Fuelled by Surprise Fall in US Employment

Australian Dollar (AUD) Extends Risk Appetite Gains

The Australian Dollar (AUD) continued to push higher against many of the majors yesterday as market risk appetite remained elevated.

Fresh signs of resilience from the Chinese economy, with its services PMI showing another strong month of growth, encouraged investors to pile into the Australian Dollar. As the ‘Aussie’ commonly acts as a market proxy for sentiment towards the world’s second-largest economy, this latest positive data gave AUD exchange rates a solid boost.

However, with forecasts pointing towards a narrowing of November’s Australian trade surplus, Australian Dollar sentiment could be dampened.

Pound (GBP) Weighed Down as UK Services PMI Underperforms

The Pound (GBP) remained on the back foot thanks to a negative revision to the finalised UK services PMI for December.

As the final PMI reading dipped from 49.9 to 49.4, this confirmed that the sector continued to contract in the final month of 2020, reflecting the ongoing impact of the Covid-19 crisis. With the economy looking set to face even further disruption with England under lockdown until mid-February, investors saw no reason to favour the Pound.

Even if the construction PMI demonstrates solid growth on the month in December, this may not be enough to give GBP exchange rates any particular boost.

Euro (EUR) Shakes Off Negative German Inflation

The Euro (EUR) largely held its ground overnight even as the German inflation rate showed another negative reading on the year.

With the headline inflation rate trapped at -0.3% for another month, the case for further European Central Bank (ECB) policy action appears on the rise. Even so, markets see limited odds of the central bank enacting further monetary loosening measures in the near future, helping to keep a floor under the single currency.

A similarly negative showing from the Eurozone inflation data could still dent the bullishness of EUR exchange rates, however.

US Dollar (USD) Trends Lower on Surprise ADP Employment Decline

The US Dollar (USD) extended its downtrend further in response to a surprise decline in the ADP employment report. While forecasts had pointed towards a modest increase in jobs during December, the headline figure instead showed a fall of -123,000.

This decline offered fresh evidence of the weakness of the US labour market, encouraging bets that Friday’s non-farm payrolls report will show a similarly negative reading. With confidence in the strength of the US economy faltering, the US Dollar failed to find any support against its rivals.

A widening of the trade deficit could add to the weakness of USD exchange rates tonight, offering fresh signs of an economic decline in the face of the Covid-19 crisis.

Canadian Dollar (CAD) Fails to Benefit from 11-Month High in Oil Prices

The Canadian Dollar (CAD) was unable to capitalise on news that Saudi Arabia had agreed to a larger reduction of its oil output than anticipated at the latest OPEC+ meeting.

Although the risk of any increase in production faded, this was not enough to give the commodity-correlated Canadian Dollar any fresh leg up against its rivals. With markets assessing that the move is more a reflection of weaker global demand for oil than anything else, this saw CAD exchange rates trending lower, even as the oil price rose to an eleven-month high in the wake of the announcement.

While forecasts point towards a slight narrowing of November’s trade deficit the Canadian Dollar could struggle to find any really boost in the near future.

New Zealand Dollar (NZD) Holds onto Stronger Footing

The New Zealand Dollar (NZD) continued to dominate its less risk-sensitive rivals yesterday in spite of the persistent lack of fresh domestic data.

With market risk appetite still generally heightened, even though the prospect of a first quarter global recovery from the pandemic appears increasingly unlikely, the ‘Kiwi’ remained on a strong footing. The relative weakness of the US Dollar also fuelled sustained demand for the New Zealand Dollar.

In the absence of any New Zealand economic data NZD exchange rates look set to remain reliant on market sentiment for the remainder of the week.

Data Releases

11:30 AUD Balance of Trade (Nov) A$6 billion
20:30 GBP Construction PMI (Dec) 55
21:00 EUR Eurozone Inflation Rate (Dec) -0.2%
00:30 CAD Balance of Trade (Nov) C$-3.5 billion
00:30 USD Balance of Trade (Nov) $-65.2 billion

Louisa Heath