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Halt the Dollar sell-off!

Halt the Dollar sell-off!

Friday’s Nonfarm payrolls report showed 151k growth in the US job market in January, lower than the expected 192k with the weakness coming in services sector employment. December’s figure was also revised down from 292k to 262k. However, the overall unemployment rate unexpectedly dropped to 4.9%, the lowest level since February 2008. This helped curb any major losses for the Dollar. Average hourly earnings also rose an impressive 0.5% MoM versus expectation of 0.3% MoM. After GBPUSD reaching 1.46592 on Tuesday morning after a sizeable Dollar sell-off, we open at 1.4530 and expect sideways trading in the absence of data releases.

The US and Eurozone economic calendars are near empty today. Data releases remain light throughout the week too with German production on Tuesday and US retail sales, EMU production, US Michigan sentiment and Eurozone GDP (all Friday) the only potential market movers. This means that markets will predominantly be sentiment driven this week. Chinese markets are closed in observance of the Lunar New Year holidays.

Although China is closed, the release of January’s foreign reserves data was closely watched by investors to gauge the extent to which the People’s Bank of China (PBoC) was forced to prop up the Yuan. Mizuho economists said the smaller decline suggests that some capital outflow restrictions imposed in January worked and they are anticipating another benign figure in February, while IHS Global Insight said “the rapid pace of depletion in recent months is simply unsustainable”.

Late last week, Premier Li reiterated that China will not boost its economy via Yuan devaluation and that there is not at risk of a hard landing as long as it maintains its reform goals. The point of concern is that if FX reserves drop to $2.8 trillion rapidly, which at current rates would be in a few months time, they’ll be below the IMF’s recommended lower bound and could create a surge of speculative selling. In that case the interest would lie in whether the PBoC relinquishes control of Renminbi Exchange Rates and lets the markets decide.

Data to watch: China & New Zealand closed for Bank Holiday. 3pm US Labor Market Conditions Index (Jan).

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