• Dollar pummeled after disappointing US employment data 

• Stock markets rally, but gold fails to capitalize on falling yields

• Australian interest rate decision and Chinese trade data next

Dollar hammered after NFP 

A disappointing US employment report inflicted some serious damage on the dollar last week. Nonfarm payrolls clocked in at 150k in October, missing the forecast of 180k, while the unemployment rate ticked higher and wage growth continued to cool off. Hence, the US labor market has started to loosen up, which is good news for the Fed in its battle against inflation.

Looser labor market conditions translated into sharp losses for the dollar. Against a basket of major currencies, the dollar lost 1% on Friday as investors became more confident that the Fed has already delivered its final rate increase in this cycle. That gave traders the green light to buy bonds again, pushing US yields much lower.

Yields on US government bonds fell dramatically last week amid a combination of softer data releases, a cautious tone by the Fed on further tightening, and the Treasury announcing it will shift its debt issuance towards shorter-dated maturities. With inflation dynamics and bond supply moving in the right direction, the question is whether yields have peaked.

While the dollar could remain under selling pressure for now, it is worth noting that every other major economy is weaker than that of the United States, so a full-scale trend reversal seems unlikely. The dollar usually thrives in late-cycle environments thanks to its safe haven characteristics, and the recent recovery in the euro is unlikely to be sustained for long with the Eurozone knocking on the door of a recession.

Stocks shine bright, but gold doesn’t

Stock markets enjoyed their strongest week of the year as US bond yields fell back to earth. The S&P 500 rose by an astonishing 6% in a single week, even despite disappointing earnings from Apple. The market is trading with a ‘bad news is good news’ mentality, as the relief from falling yields has overpowered earnings concerns, at least for now.

Gold is another asset that is supposed to shine in an environment of collapsing yields and a weaker US dollar, but that hasn’t played out. Instead bullion lost ground last week, which is an alarming sign.

The inability of gold to capitalize on the favorable developments in bond and FX markets suggests that safe-haven flows are being unwound. It is becoming clearer that the situation in Gaza is unlikely to escalate into a broader regional conflict, especially after Hezbollah’s leader played down the prospect of joining the war. The recent drop in oil prices tells a similar story.

Yen cannot catch a break, RBA decision next

Speaking of relative weakness, the Japanese yen barely managed to advance last week, even against a wounded US dollar. Most of its sluggishness traces back to the Bank of Japan’s underwhelming decision last week and news that Tokyo didn’t intervene in the FX market in October after all.

Looking ahead, the spotlight will shift to the Reserve Bank of Australia, which will announce its decision at 03:30 GMT on Tuesday. Markets assign a 60% probability for a rate increase following an upside surprise in inflation recently. Booming population growth, a tight labor market, and near-record home prices also pose inflation risks.

A decision to raise rates could briefly boost the Australian dollar, but the currency’s longer-term trajectory will also be decided by global risk appetite and how the Chinese economy evolves. In this sense, China’s trade numbers for October will also be closely watched when they are released tomorrow.