US Open Note – Dollar continues the sell-off after ADP and ahead of NFP; oil erases losses

ADP dissapoints; NFP comes out tomorrow

After the disappointing release of the ADP report which announced 128K workers versus 300K that was expected, the dollar is still trading lower. After two days in a row of gains, the dollar index retraced to a low of 102.12. As dollar/yen traded over 130 for the first time since the middle of May, the trend of the yen weakening has re-established itself. Sterling is holding above $1.25, within the short-term moving averages.

Yesterday, Bullard stated that the path that the Fed has put out for gradually increasing interest rates by 50 basis points is appropriate for the time being, adding that it is not preferable to increase rates too quickly. The market is still pricing in the beginning of an easing cycle after the middle of 2023, but this will only occur if there is a recession in the United States in the coming year. Friday’s non-farm payrolls report may show some signs for next moves.

BoC raises rates as expected

As was anticipated, the Bank of Canada raised interest rates by 50 basis points, bringing them to 1.5%. It cautioned that interest rates will need to increase much more and that, if necessary, it may be even "more assertive." In addition, the bank stated that it is expected that inflation will increase before eventually declining. Evidently, the forward guidance leaves room for a 75 bp increase in the future if that turns out to be necessary. It is impossible to disregard the aggressive forward guidance. Dollar/loonie is moving sideways around 1.2650, remaining marginally below the 200-day SMA.

Stocks steady and oil flattens

On Thursday, global stock markets were mostly unaffected by recent volatility due to a drop in oil prices caused by speculation that Saudi Arabia may increase output. This helped to offset concerns of rising inflation and the prospect of monetary policy becoming more restrictive.

It is possible that Saudi Arabia and other OPEC states will increase their oil production in order to compensate for the decline in output that will be caused by Russia. Such a move has the potential to bring down the prices of oil and the soaring inflation rate, and it may also clear the way for President Joe Biden to pay a historic visit to Riyadh.

Two sources within OPEC+ have stated that the organization is working on a plan to make up for a drop in Russian oil output. This comes as Russia's production has decreased by approximately 1 million barrels per day as a direct result of sanctions imposed by the West on Moscow in response to Moscow's invasion of Ukraine.

Franc falls and euro rises

The Swiss franc hit a one-month high against the euro on Thursday as Swiss inflation jumped to its highest level in 14 years but is currently trading near its opening level. Demand began to materialize for the euro as the price approached $1.07.

But an inflation estimate for the Eurozone this week that set a new record adds to the pressure on the ECB, which will meet next week for its policy meeting, to take action to curb price.

Next week, it is widely anticipated that the ECB will make the announcement that it will cease QE. There has been some speculation of a sudden increase in interest rates, but most people believe this to be an extremely remote possibility. Even the hawks have come around to the idea of a liftoff on July 21, although they are still emphasizing the necessity of a 50 basis point move. Despite this, expectations of ECB monetary policy tightening have increased in light of the inflation figures released this week.

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