Dollar: Non-Farm Payrolls Fail to Impress

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Daily FX Market Roundup 06-06-14

Dollar: Non-Farm Payrolls Fail to Impress

EUR: Potential Move to 1.37

CAD: Underlying Weakness in the Labor Market

NZD: Beware of RBNZ Next Week

AUD: Chinese Trade Balance on Sunday

GBP: Trade Deficit Hits 5 Year High

JPY: PM Abe Asks for Earlier Reallocation of GPIF Assets

Dollar: Non-Farm Payrolls Fail to Impress

The main takeaway from today’s non-farm payrolls report is that the U.S. labor market fails to impress. Only 217k jobs were created in the month of May, which was marginally better than expected but virtually inline with the consensus forecast. Average hourly earnings grew 0.2% and the unemployment rate held steady at 6.3%, which is good news but not good enough to invigorate the dollar’s rally. While there is no question that the labor market is improving with the U-6 unemployment rate dropping to 12.2% from 12.3%, today’s report is not strong enough to force the Federal Reserve to reevaluate its monetary policy plans. In fact the data only reinforces the central bank’s cautious approach to unwinding stimulus. While there was enough improvement for the Fed to continue tapering it will be some time before the central bank considers raising interest rates. Expectations for steady monetary policy limited the reaction of the dollar and Treasuries to NFPs. The greenback traded slightly higher against the euro, Japanese Yen and British pound but the gains were less than 0.25%. USD/JPY did not even try to make a run for 103 and without major upside surprises in U.S. data this resistance level could be extremely difficult to break. The Dow and S&P 500 even hit new highs today which indicate that investors are not worried about today’s report accelerating the Fed’s tightening plans and are instead simply satisfied with today’s release. There is not much in the way of market moving U.S. data next week outside of the retail sales report. Consumer spending is expected to rebound but unless it deviates 2% or more from forecast, the impact on the greenback should be limited. In the coming week, the dollar should take a back seat to post ECB position adjustments, Chinese and UK data, the RBNZ rate decision and Australian employment.

EUR: Potential Move to 1.37

After yesterday’s sharp intraday reversal, EUR/USD retreated slightly on the back of weaker German industrial production and a mild post NFP dollar rally. Today’s sell-off has not taken the currency pair below any key support levels and for this reason, we continue to believe that the currency pair could test 1.37 on the back of additional short covering and the expectation that the central bank will not take any additional action until they see how the economy reacts to their latest moves, which could be months later. The rally in European equities and turnaround in the euro indicates that investors were impressed by the central bank’s radical measures and believe their active approach to monetary policy will be enough to stimulate growth. Also, Draghi’s comment that interest rates are pretty much at their lower bounds means they are not considering additional rate cuts. So while the ECB maintains a dovish bias and made it clear that they are not done easing, for the time being investors perceive this week’s announcements to be positive for the Eurozone economy and for the euro. With foreign investors attracted by the performance of European equities and the ECB’s proactive monetary policy measures, we expect the EUR/USD to extend its gains in the coming week. Like the U.S., there’s not much in the way of market moving data but the central bank’s actions this week should be enough for some follow through.

CAD: Underlying Weakness in the Labor Market

The Canadian, Australian and New Zealand dollars ended the North American trading session unchanged against the greenback. In months when Canadian employment is released at the same time as U.S. non-farm payrolls, Canada’s report always gets lost in the shuffle. This is particularly true this month report because job growth was right in line with expectations. Economists were looking for an addition of 25k jobs in the month of April and a total of 25.8k jobs were created, which at first glance appears to be positive for the economy. Unfortunately if you look beneath the headlines the labor market is not doing nearly as well as this number suggests. All of the job growth was part time as full time employment dropped for the second month in a row by 29k. The unemployment rate also increased to 7% from 6.9% while the participation rate held steady at 66.1%. So ultimately today’s report reinforces the Bank of Canada’s pessimistic economic outlook and extends a trend of softer reports that should be positive for USD/CAD. The New Zealand and Australian dollars will be in focus next week. According to Bloomberg, economists are looking for a rate hike which we are surprised about because there’s a very significant chance that the central bank will keep interest rates unchanged and possibly even lower its inflation and interest rate forecasts. If they choose to do so, it could send the New Zealand dollar sharply lower. The Australian dollar on the other hand will be sensitive to Chinese trade and retail sales numbers along with Australia’s employment report. Chinese growth may have hit a bottom but the improvements in Australia are relatively new which explains why the rally in AUD/USD has been so cautious.

GBP: Trade Deficit Hits 5 Year High

The British pound ended the day unchanged against the U.S. dollar and euro despite a significantly weaker than expected trade report. Britain’s trade deficit hit a 5-year high in April due to a decline in exports outside of the European Union. The visible trade deficit was expected to rise to 8.65 billion pounds from 8.478 billion but it ballooned to 9.6 billion. Weakness in the export sector highlights the vulnerability of the U.K. economy and explains why the central bank continues to believe that easy monetary policy is necessary. There has been very little volatility in GBP/USD in the recent weeks and unfortunately we are skeptical about the ability of next week’s industrial production and employment reports to take sterling out of its recent range. The same is true for EUR/GBP, which hit a new one year high on Thursday but failed to extend its gains.

JPY: PM Abe Asks for Earlier Reallocation of GPIF Assets

The Japanese Yen ended the day slightly lower against most of the major currencies. While the leading and coincident index declined in the month of April, both numbers exceeded expectations. Without a big move in USD/JPY off the non-farm payrolls report, the volatility in the Yen crosses was limited. The only big development overnight was Prime Minister Abe’s request that his Health and Welfare Minister look to accelerate the decision on re-allocating the Government’s Pension Investment Fund, which controls more than Y128.6 trillion yen or about USD$1 trillion worth of assets. Originally the decision was expected to be made at the end of the year but could now come in August or September. Considering how much the GPIF controls, even a 1% change in allocation would involve moving approximately 1 trillion yen. If the GPIF were to change its allocation, it would most likely involve greater exposure to domestic and foreign equities along with foreign bonds as the government seeks higher return for pensioners. Not only would this be positive for the Nikkei but also for USD/JPY.

Kathy Lien
Managing Director

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