USD – Nonfarm Payrolls and Fitch downgrade

The initial response to the release of the non-farm payrolls report on Friday was a sell-off in the dollar. However, the market changed its outlook when it analysed the higher wage data, leading to a recovery.

Nevertheless, bonds saw increased demand, indicating a growing belief that the Federal Reserve is likely finished with rate hikes, an opinion reiterated by Goldman Sachs in a note. Despite the data, the probabilities for future Fed actions remained largely unchanged, with only a 30% chance of another rate hike as the market becomes more confident in the economy's cooling.

It is highly probable that bond buyers were ready to purchase Treasuries regardless of the data outcome. While 30-year yields rose significantly during the week, potential buyers were cautious about entering the market amid fears of a strong jobs report. However, when the data turned out to be "good enough," they seized the opportunity, pushing yields lower and causing the dollar to decline.

Initially, the dollar's reaction was consistent across the board, with the euro and pound showing particular strength. The pound even reached its highest levels of the week in the aftermath, and USD/JPY declined below 142.00.

As the day progressed, there was a partial recovery in stock markets, which had started strong but faltered, resulting in a 1% reversal. Commodity currencies were adversely affected, with the Canadian dollar ending up at the bottom of the list, despite gains in oil and gas prices.

In the near future, the focus will be on the US Consumer Price Index (CPI) report, which will likely influence market sentiment regarding future Fed actions. The market is shifting its attention from expecting more rate hikes to contemplating when the Fed might begin cutting rates in 2024.

Last week in the US was expected to be uneventful, but Fitch Ratings had other plans. Their unexpected decision to downgrade US debt from triple A to double A plus had significant repercussions in the market. Janet Yellen, the US Treasury secretary, criticized the timing of the decision, calling it "arbitrary."

While the downgrade is not likely to have a lasting impact on the global demand for US debt, as there are limited attractive alternatives, it has prompted concerns about the growing size of the US national debt. This concern arises at a time when Janet Yellen and her Treasury team are actively increasing debt issuance, and the Federal Reserve has recently raised interest rates, making the cost of servicing the mounting debt even more expensive.

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