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Friday Sunrise: Dollar Eyes Payrolls, Pound and Euro Manufacturing Data, Canadian Dollar's Tariff Headache

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Foreign exchange

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Dollar: Payrolls

The release of the monthly US jobs report has been a long-standing highlight for global foreign exchange markets, but at the current juncture it has lost its punch. Why? Because the Federal Reserve has met its employment mandate and what matters for future Fed policy is about more than just jobs.

Nevertheless, markets will be looking for a headline non-farm payroll reading of 189K.

Keep an eye on average hourly earnings as this could give a gauge on where inflation is headed and it appears inflation is what the Fed is primarily concerned with at present.

Markets are eyeing a reading of 0.2% for the monthly average hourly earnings and 2.7% for the annualised version.

A beat on the above could support USD into the weekend.

Pound: Manufacturing Data

For Pound Sterling, finally we have some data from the economic docket.

It's the start of a new month, and therefore we get the first of the three PMI releases detailing how the UK economy performed in May.

The manufacturing PMI is out ahead of the weekend and markets are looking for a reading of 53.5, down a touch from April's 53.9.

A disappointment here will add to the soggy tone surrounding the UK currency.

Canadian Dollar: Biggest Loser of Tariffs

The imposition by the U.S. of tariffs on aluminium and steel from the EU, Canada and Mexico was met with a largely muted reaction, but the Canadian Dollar was one standout loser.

The reason being that much of the Canadian Dollar's price action has been linked to the progress of the renegotiation of the NAFTA free trade deal between the US, Mexico and Canada. Markets are reckoning the latest tariffs are suggestive of the talks ultimately reaching a disappointing conclusion.

And for Canada and its currency this is not good.

Canada, the EU and Mexico have announced plans for retaliatory tariffs, meaning the trade war has begun.

"The fact that the US would start such a fight with some of the country’s closest allies based on some perceived threat to national security is a big big shock not only to the global trading system but to the traditional global political alignment. It’s a go-it-alone strategy that upends the entire post-WWII rules-based international economic system. I don’t see how this ends well for anyone," says Marshall Gittler, an analyst with ACLS Global.

The EU has said it would take immediate steps to retaliate, having prepared a list of products to impose tariffs on reportedly amounting to USD 3.3bn, while both Mexico and Canada has vowed to slap tariffs on as much as USD 12.8bn on US steel, aluminium and other products.

We are sure the headlines surrounding this budding trade war will continue to flow today, and the CAD could be particularly sensitive to anything new coming out of the Whitehouse.

Australian Dollar: Any Strength to be Limited

The Australian Dollar tracked sideways with trade fears re-emerging.

"In Asia we will be keeping a close eye on PMI’s and any US-China trade moves with Commerce Secretary Ross scheduled to be there later this weekend. Overnight, US NFP and ISM will be watched closely for a read on growth momentum. AUD rallies are likely to be faded with geopolitical risks elevated," says David Plank at ANZ.

Euro: Manufacturing Data

A slew of manufacturing numbers are due out of the Eurozone on the first day of the month.

Italian, French and German manufacturing PMI numbers are all released in the 15 minutes before 09:00.

But the Eurozone-wide PMI is released at 09:00 and markets are looking for a release of 55.5. Has the slowdown seen at the start of the year finally ended? Today's numbers will go some way in answering this question.

Italian politics are no longer the concern they were when we entered the week.

Giuseppe Conte will be sworn in as prime minister along his cabinet at 15:00 BST today, following almost three months of continually failed attempts to put together a government.

Italian bonds yields tightened yesterday, with the 10y yield falling around 18bps to 2.7% before rising again to 2.8%.

The Italian situation has stabilised for now, but as we observe here the past episode of instability might just have shaken the currency's long-term prospects.

New Zealand Dollar: Terms of Trade Augur for Strength

Data out of New Zealand gives an hint as to why some economists see the currency remaining supported over coming months.

The New Zealand Terms of Trade remain very high; over the March quarter, there was a 1.9% dip, but that was from record high levels (since the advent of quarterly data).

"Moreover, the quarterly dip is likely to prove temporary," says Nathan Penny, Senior Rural Economist at ASB. "Dairy export prices have since rebounded after temporary weakness. Moreover, the suite of NZ export prices is very healthy. To name just a few kiwifruit, lamb and forestry prices are all faring well."

ASB say they anticipate that the very high Terms of Trade will be one factor underpinning the NZ dollar over 2018. Indeed, they expect the NZD/USD to average 0.72 over the remainder of the year.