Rising oil prices and strong US job growth sent carry trades to fresh highs today. With the labor market sparing the US economy from a major downturn, the market is hungry for risk and yield. Selling in the Japanese Yen has been so strong that the currency hit a new record low against the Euro, a 20 year low against the high yielding New Zealand dollar, a 16 year low against the Australian dollar and a 14 year low against the British pound. In other words, the Yen crosses hit decade if not multi decade highs. The move in oil prices has also pushed the Canadian dollar to a new 30 year high.
Since the beginning of the year, crude prices have increased over 40 percent with the price per barrel now at a 10 month high. Oil prices have a big impact on inflationary pressures both here in the US as well as globally. If crude continues to rise, it will not be long before the average price of gasoline in the US moves back above $3 a gallon. When this happens, companies around the world will begin to add fuel surcharges, which will also boost core inflation. Over the past few years, we have seen oil become the primary driver of hawkish monetary policy across the globe. The higher oil prices rise, the longer central banks will keep interest rates high, which in one word, boils down to CARRY. $80 oil is now in focus and as long as prices continue to climb, the central banks of these respective countries have no choice but to leave interest rates at their currently lofty levels, keeping demand for carry trades intact. For more on the ramifications of $80 oil on the currency market, see our Special Report
As for US job growth: the biggest beneficiary will be USD/JPY.
[I][B]From our NFP Instant Insight[/B][/I]
Not only did US companies add more jobs than the market was expecting in the month of June (132k actual vs. 125k forecast), but job growth in May was revised up materially by 33k. Average hourly earnings on an annualized basis was also revised higher to 4 percent, which made the drop in wage growth a more tepid 3.9 percent. This means that not only do more Americans have jobs, but wages are also growing. The economy is therefore healthy enough to keep the housing market from collapsing and justifies the Federal Reserve’s priorities of putting inflation ahead of growth. Expect interest rates to remain unchanged for the remainder of the year - this report is hawkish from both a growth and inflation standpoint. The strong number will help to pacify concerns about a slower second half and keep carry trades in play. USD/JPY, which is very sensitive to interest rates will benefit the most. With the ECB postponing a rate hike until the fourth quarter, this should also mark a near term top in the EUR/USD.
[B]Details of the Report:[/B]
[B]Change in Non-Farm Payrolls:[/B] 132k Actual, 190k Previous (Revised from 157K)
[B]Unemployment Rate:[/B] 4.5% Actual, 4.5% Previous
[B]Change in Manufacturing Payrolls: [/B] -18k Actual, -7k Previous (Revised from -19K)
[B]Average Hourly Earnings:[/B] 0.3% Actual, 0.4% Previous (Revised from 0.3%) >> Annualized rate was 3.9% prior was revised from 3.8% to 4.0%
[B]Average Weekly Hours:[/B] 33.9 Actual, 33.8 Previous (Revised from 33.9)