Currencies Soar as US, Canada Labor Data Beat – Implications for Fed Next Week

Currencies and equities traded sharply higher on Friday following shockingly strong US and Canadian labor market numbers. Instead of losing another 7.5 million jobs in the month of May, US companies added 2.5 million jobs. No one, not even any of the 78 economists surveyed by Bloomberg were looking for job growth last month so today’s report completely defied expectations. It reinforces the view that a recovery is underway and suggests that the US government’s stimulus program effectively stabilized the economy. The CARES act provided forgivable loans if businesses rehire and that’s exactly what we saw in today’s numbers. Half of the increase was in food services and restaurants who rushed to reopen ahead of the Memorial Day holiday. The unemployment rate dropped to 13.3% from 14.7% instead of rising to 19% like economists anticipated. The only bad news was wage growth as earnings fell -1%, marking the first decline ever for the series.

Is the labor market recovery sustainable? Quite possibly because the first half of May marked only the beginning of state re-openings. As more states ease restrictions, hiring will resume especially ahead of the June 30th deadline to rehire employees and qualify for loan forgiveness. USD/JPY shot higher in response but the strong rally in stocks boosted high beta currencies such as sterling and the Australian dollar avoid steep losses. EUR/USD pulled back after its 8 day long rally but still managed to hover near 1.1300.

This report will go a long way in ensuring a brighter outlook from the Federal Reserve next week. The Fed is widely expected to leave monetary policy unchanged and their resistance to negative interest rates will be validated by today’s report. Manufacturing and service sector activity also improved which should lead to a brighter outlook. If next week’s rate decision is laced with optimism we could see renewed gains iforthe US dollar.

Canada also surprised the market with job growth last month. Instead of losing another 500K jobs, Canada added 289K jobs in the month of May and most of them were full time. The unemployment rate increased slightly to 13.7% from 13% but the participation rate saw a nice improvement, a sign that workers are returning to the workforce. The IVEY PMI index also rebounded to 39.1 from 22.8, confirming that a recovery is underway. Even though US numbers were good, USD/CAD hit a 3 month low after the report.

In general the rallies in currencies are overstretched. EUR/USD finally pulled back after 8 straight days of gains but the AUD/USD is up for seven days in a row and NZD/USD is up for five. The risk rally is strong but with no major economic reports scheduled for release outside of the US next week, it could be time for the US dollar to shine.