Post date: 10/05/2021 15:35

A much weaker-than-expected labour report broke the string of positive economic surprises out of the US and sent the dollar tumbling versus almost every major currency worldwide. Bond yields fell and commodities soared once again, dragging upwards commodity dependent currencies. In the G10, the Australian, New Zealand and Canadian dollars, together with the Norwegian krone, topped the tables, rising a massive 1% against the US dollar. In emerging markets, the Brazilian real, about which we had been pounding the table for some time, exploded upwards by nearly 4%, as the COVID wave there starts to break.

This week we will be paying very close attention to the US inflation report for April. Another strong inflation print after the increase in March would be an unpleasant coda to the weak payroll report last week, indicating perhaps that supply constraints are becoming a serious concern for the short term at least. As this is written, Scottish election results do not seem to have made much of a dent on sterling, indicating perhaps that independence is not seen as a medium-term risk for the UK.


The Bank of England decided to slow down the pace of bond purchases, but this seemingly hawkish measure was dampened by the decision to leave both the expected end date of the purchases and the total purchase amount unchanged. Scottish election results were released over the weekend and traders seemed to take a positive way of the results during Asian trading hours. While there will be a clear pro-independence majority in the Scottish parliaments, markets seemed to take heart at indications from Boris Johnson’s Government that any immediate push for a new referendum will be vetoed.


What little news there was out of the Eurozone was generally positive. German retail sales surprised to the upside, suggesting that the much awaited catch up with the US and UK economies as the lockdowns are lifted may finally be here. Also, though somewhat under the radar, progress was made on the political front and the EU’s pandemic programmes moved closer to launch, which should provide a tailwind to the Eurozone’s growth prospects starting in the second half of the year. The common currency reacted mostly to the weak payrolls report out of the US and rose strongly for the week, a trend we expect to continue over the medium-term.


A very weak payrolls report out of the US contrasted with the string of positive news elsewhere and, particularly, the price pressures that continue to develop along strained supply chains. It is possible that generous unemployment benefits and business reluctance to offer the higher wages warranted by a heating economy are slowing down hiring temporarily. If so, this issue should resolve itself over the next few months. We remain very positive on US economic developments in the short and medium term, but will pay very close attention to indicators of labour market health over the next few weeks. Meanwhile, our view that the path of least resistance for the US dollar is down received some strong validation last week.