US rate hike looks more likely early next year

The US economy has not built enough momentum to justify a rate hike, writes Gaurav Kashyap.

September’s US non-farm payrolls came in at a meagre gain of 142,000 jobs, well below expectations of 201,000. Matt Rourke / AP Photo

September came and went – and with it went expectations of a Fed rate hike. Many observers had viewed last month as the earliest window in which the Fed would hike US interest rates, but instead it held its policy unchanged at a meeting on September 17.

The US economy has not built enough momentum to justify a rate hike, with domestic factors, primarily an anaemic jobs market, handcuffing the Fed. The Fed further noted that foreign factors – including the global economic slowdown and China’s liquidity crunch – could have an effect on future policy decisions.

All factors considered, it remains unrealistic to expect a US rate hike until the end of the first quarter of next year, and this view is further solidified by last month’s dismal jobs report.

September’s US non-farm payrolls came in at a meagre gain of 142,000 jobs, well below expectations of 201,000. Perhaps more worryingly, August’s figure was revised down to 136,000 from a previous reading of 173,000. Although the unemployment rate remained unchanged at 5.1 per cent, the labour force participation rate sank to 62.4 per cent – its lowest since October 1977.

Capping off the gloomy jobs picture was the lack of any wage growth last month. Zero growth in average pay (below 0.2 per cent expected and 0.4 per cent in August) will hurt future spending and inflation expectations. This will not bode well for future consumption and spending, a key piece in the US economic recovery.

Following the disastrous report, future rate hike expectations from the Fed tanked to 8 per cent, which laid into US dollar forecasts – and although the US Dollar Index, which measures the greenback against a basket of major currencies, struggled to close last month in the black, the drawdown in Fed sentiment after the report suggests that upsides will be capped for the greenback through this month, as volatility is expected to remain high.

We await the release of the Fed’s meeting minutes on Thursday (into which we will get a more detailed insight to the Fed’s view on future rates) before adopting a short-term view that opportunities to short the dollar will arise as a result of any further weakness in the key US data points. We maintain our first level of support at 94.20 for the US Dollar Index, with further support at 93.40. Upsides will be capped at 96.30 levels.

Euro trading has been choppy, particularly against the US dollar. The euro-dollar traded as low as 1.1090 and as high as 1.1460 before closing the month 0.3 per cent lower. The euro is caught in a precarious position – it has grown into a funding currency of sorts, and as a result any weakness in markets on a global level has kept euro gains in check. We do not expect any major surprises during the release of the European Central Bank meeting minutes on Thursday, and instead look for hints of future easing plans during their release. We expect the euro to remain rangebound through the month ahead and will watch how it trades at 1.1180 levels, which is the level of the convergence of the 50- and 100-day moving averages. Support below this level will fall at 1.080 levels, with upsides capped at 1.1450 in the month ahead.

After a volatile month of trading, the Indian rupee closed last month on a bullish note against the greenback. The current-month DGCX Indian Rupee Quanto futures contract closed at 65.91 (down 1.79 per cent on the month) while the inversely quoted rupee-dollar current-month DGCX Futures contract gained 267 points (up 1.79 per cent on the month). The Reserve Bank of India last month cut its rates more than expected – the repurchase rate was reduced to 6.75 per cent from a previous 7.25 per cent and the reverse repo rate was cut to 5.75 per cent from a previous 6.25 per cent.

The larger-than-expected cuts, along with comments from the central bank that there would no further easing action in the near term, have improved the sentiment for the rupee, and we expect upsides towards 155 levels in the near-month rupee-dollar contract, which is the equivalent of 64.50 levels in the dollar-rupee contract.

Gaurav Kashyap is the head of futures at AxiTrader ME DMCC.

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