Dollar Post Payrolls Boils Down To Positioning

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Taking a look at recent U.S. economic reports, the government shutdown in the month of October had very little impact on the economy. We have already seen upticks in service and manufacturing sector activity and today’s non-farm payrolls report shows that the shutdown had virtually zero impact on the labor market. Despite the uncertainty surrounding the fiscal crisis in Washington, U.S. companies added 204k workers last month, sending the dollar sharply higher. This was the second largest month of job growth since February and all of those gains were in the private sector with the government shutdown costing the U.S. economy only 8k public sector jobs. For the skeptics out there who doubted the Federal Reserve’s willingness to ease before March, today’s report extends a string of positive economic surprises that could give policymakers the confidence to reduce stimulus before March 2014.

Investors bought dollars aggressively on the back of the payrolls report and its outlook now boils down to positioning. Considering that the most optimistic forecast from economists was 175k jobs, investors were not positioned for such a strong report. According to the stale but still valid CFTC IMM report released earlier this week showing positioning as of late October, investors still hold a massive amount of long EUR/USD positions. With consistently positive U.S. data surprises coming at a time when the ECB just reduced interest rates and indicative their readiness to ease again if needed, we expect to see an unwinding of more long EUR/USD positions. At minimum we expect the currency pair to drop to the 200-day SMA at 1.3215 and if the move becomes extended down to 1.30. If the currency pair rebounds, 1.3450 should continue to cap gains in the EUR/USD. As for USD/JPY we expect the pair to break 99 in the near term with a potential test of 100.

While we think today’s NFP report could accelerate the gains in the dollar, it would be remiss not to mention the areas of weakness. The unemployment rate rose from 7.2% to 7.3% in the month of October while the participation rate dropped to a 3 decade low of 62.8% from 63.2%. The increase in both numbers are related to loss of federal jobs and therefore temporary. There was significant increase in temporary layoffs last month and without this impact, the unemployment rate would be much lower. Remember, the household survey gives us the unemployment rate by interviewing 60k workers while the establishment survey gathers payrolls data from 160k businesses and government offices. Average hourly earnings also grew by a less than expected 0.1%.

The bottom line is that if the government shutdown did not happen, the unemployment rate could be at 7.0% and with the anticipated snapback in government jobs in November, labor market conditions are strong enough for December tapering to be a serious option for the Fed.

Kathy Lien
Managing Director

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