U.S. Dollar Erases Losses after Jobs and Wage Growth Comes Back with a Bang in October

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- USD pares loss on strong October jobs and wage data.

- Keeps Fed on track say economists, but USD is at risk.

- Trade war detente, U.S. midterms to undermine demand.

The Dollar pared losses Friday after official data revealed a stronger-than-anticipated increase in the number of jobs created by the economy during October, and a healthy pick-up in the rate of wage growth.

The U.S. created 250,000 new jobs during the recent month, up from 134,000 in September and far ahead of the consensus for an increase of 194,000.

This is also far above the average 211,000 increase seen in U.S. employment over each of the last 12 months and was enough to keep the unemployment rate steady at 3.7%, its lowest since 1969.

Average hourly earnings grew by 0.2% during October, down from 0.3% in September, although this was still enough to push the annualised rate of wage growth up from 2.8% to 3.1%. 

The 3% wage growth level has long been seen by central bankers as a Rubicon as far as interest rates go, and worker pay growth just crossed that threshold, registering its fastest increase since 2009.

"Hiring heated back up after the hurricane-impacted prior month, and wage inflation pushed over 3% despite only a trend-like monthly advance," says Andrew Grantham, an economist at CIBC Capital Markets. "A higher than expected gain in jobs and annual wage increase above 3% should be positive for the US$ and negative for fixed income."

Markets care about the labour market data because falling unemployment and improving job creation, according to conventional thinking on the subject, put upward pressure on wages.

Pay growth leads to increased demand within an economy and exerts upward pressure on inflation, with implications for interest rates and financial markets.

Changes in interest rates are only made in response to movements in inflation but impact currencies because of the push and pull influence they have on international capital flows and their allure for short-term speculators.

"The US jobs market remains incredibly strong and with wages starting to accelerate, domestic price pressures will increase. This will keep the Federal Reserve on its path of “gradual” interest rate hikes with next week’s FOMC meeting set to signal a December move," says James Knightley, chief international economist at ING Group.

The US Dollar index was quoted 0.09% lower at 96.20 Friday after paring back an earlier 0.26% loss, while the Pound-to-Dollar rate handed back earlier gains to trade 0.02% lower at 1.2997 and the Euro-to-Dollar rate eased back to trade 0.15% higher at 1.1419 for the session. 

The Federal Reserve has raised interest rates eight times since the end of 2015, taking the Federal Funds rate range to between 2% and 2.25%. Analysts say the top end of that range will reach 3.25% around the end of 2019, with the next increase seen in December 2018.

However, for the U.S. Dollar it is events on the international stage that matter most for the moment. Bloomberg News reported Friday that President Donald Trump has asked officials to begin drafting a trade agreement he can present to Chinese President Xi Jingping at the G20 summit on November 30.

China's economy is creaking under the strain of tariffs imposed by President Donald Trump on around $250 billion of goods exported to the U.S. each year.

Trump has previously threatened to impose tariffs on a further $267 billion of Chinese goods if the country does not change its "unfair" trading practices.

China's National Council said Wednesday the economy is being damaged by "external sources" and is in need of stimulus to temper an ongoing slowdown. Official data showed growth falling from an annualised pace of 6.6% to 6.5% during the third-quarter. 

Rumours of a trade deal has been positive for global markets and bad for the U.S. Dollar because many had ancitipated that the tariff fight between the world's two largest economies would be bad for global growth, lending a supportive bid to the safe-haven Dollar during recent months. 

However, with that supportive bid now waning, headwinds for the Dollar are mounting. Not least of all because November 06 will see Americans go back to the ballot box to determine the partisan composition of Congress.

This could see the Trump administration's hands tied as far as lawmaking and economic policy goes if the opposition Democratic Party can win back a majority in the House of Representatives. Many polls suggest that it will.

"Positioning and valuation lean towards a deeper correction in the USD ahead of the midterms. A mix report offers some room to repricing the global equity convergence theme, favoring a deeper correction in the broad USD. We continue to like the upside in AUD in the G10, maintaining tactical long exposure to CAD. We also hold short exposure to USDJPY," says Mark McCormick, North American head of FX strategy at TD Securities. 

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