Will Payrolls Help USD? Don’t Bet On It.
Daily FX Market Roundup 03.31.16
The U.S. dollar is trading steady to lower against most of the major currencies ahead of Friday’s non-farm payrolls report. It was weaker in the first part of the North American trading session but clawed back towards the end of the day. This suggests that investors are cautiously hopeful that labor, the one if not sole area of strength in the U.S. economy will save the U.S. dollar. Unfortunately we believe that dollar bulls will be sorely disappointed by tomorrow’s report for a numbers of reasons.
First, Non-farm payrolls is only important when it can be a game changer for Federal Reserve policy but Janet Yellen made it very clear that they have no intention of raising interest rates in April and unless there’s significant improvements at home and abroad, rates will remain steady in June as well. If the labor market report is weak, it will validate the central bank’s decision to slow tightening and intensify the dollar’s losses. If the report is strong, the skeptics will be quick to say that there will be no impact on Fed policy. Unless payrolls rise by 300k or more, the jobless rate tumbles AND average hourly earnings rise by more than 0.4% with minimal downward revisions to the past month’s report, there will be areas of weakness analysts will pick on as reasons for why rates will remain unchanged. Secondly higher job growth after last month’s big upside surprise will be difficult to achieve especially given the deterioration seen in other reports (more on that later). Third, average hourly earnings needs to rise strongly to revive the market’s hope for recovery and meeting the 0.2% forecast won’t be enough.
Taking a look at a number of U.S. indicators related to labor market activity, there are far more arguments in favor of a softer release. According to ADP, private payroll growth slowed with employment rising 200K vs. 205K, job cuts increased 31.7% in March according to Challenger, jobless claims ticked higher and consumer sentiment deteriorated according to the University of Michigan index. However the drop in confidence was offset by the improvement reported by the Conference Board. Continuing claims also fell to its lowest level since October but we have long learned that fewer job losses doesn’t always translate to stronger job growth. Yet with the single most important leading indicator for non-farm payrolls – non-manufacturing ISM not released until after NFP, handicapping this month’s report is more difficult than usual.
The decline in the U.S. dollar drove euro to its strongest level in 5 months. German economic data was actually weaker than expected with retail sales falling for the second consecutive month and German unemployment rolls failing to improve like economists anticipated. However the strong upside momentum in EUR/USD overshadowed the softer reports and drove EUR/USD above 1.14. While it appears that the currency has found some resistance near that level, the main price target to focus on is 1.15. Friday’s non-farm payrolls report will undoubtedly affect the currency pair but unless the U.S. report is very strong (and we don’t think it will be), pullbacks in the currency pair should be bought.
Unlike euro, the positive momentum in the British pound is fading. For the second day in a row, sterling ended the day unchanged versus the greenback. U.K. data was better than expected – we rarely see U.K. GDP numbers revised but growth in the fourth quarter was stronger than anticipated. Year over year, GDP growth exceeded 2% in the fourth quarter. Mortgage approvals also dropped less than anticipated while consumer confidence held steady. The greatest risk for sterling this morning was the speech by Bank of England Governor Mark Carney but he made no specific mention of Brexit risks or the economy. Losses were avoided for the time being but on a technical and fundamental basis we continue to look for a reversal that will take GBP/USD back to 1.4200.
Wild swings were seen in USD/CAD today, which broke below 1.2900 and hit a 5-month low before recovering quickly and aggressively to end the day near 1.3000. The intraday reversal in the currency pair caught everyone by surprise because there was no news or catalyst. Canada’s economy grew 2 times faster than anticipated in the month of January and this helped lift year over year GDP growth to 1.5% from 0.6%. Oil prices also edged higher while the U.S.-Canadian 2 year yield spread moved in favor of losses in USD/CAD. Policymakers don’t appear alarmed with the rise in the loonie with Bank of Canada Deputy Governor Patteron even citing loonie weakness as a source of strength for exports this morning. As such, we believe that USD/CAD will make another run for its 5 month lows.
The Australian and New Zealand dollars also ended the day unchanged after racing to new highs. Stronger New Zealand business confidence helped keep NZD afloat while lower job vacancies and a drop in new home sales led AUD to underperform its neighbor currency. The commodity currencies will be in focus tonight with Australian and Chinese PMI reports scheduled for release. The uptick in business confidence in the region suggests that China’s economy may finally be finding some footing. However if we are wrong and the data is weak then it would be the perfect catalyst for a correction in AUD and NZD.
Finally the resilience of USD/JPY may have a lot to do with the March 31st fiscal year end in Japan. Japan’s Tankan report is scheduled for release this evening. This is the most important piece of Japanese data on the calendar and we are looking for broad deterioration in manufacturing and non-manufacturing confidence.