Dollar Snaps Back After Payrolls

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Based on the price action in the FX market, investors are relieved to see an increase in job growth. Even though the unemployment rate ticked higher and wage growth stagnated, non-farm payrolls beat expectations, rising 175K compared to a forecast of 163K which was good enough to squeeze the dollar higher. The fact that payrolls exceeded 150K was enough for everyone including the Federal Reserve to breathe a sigh of relief. The rise in the unemployment rate from 7.5% to 7.6% is an annoyance as is the stagnation in average hourly earnings and the downward revision to last month’s report but the U-6 unemployment rate, the number economists follow more closely actually declined last month, giving the central bank peace of mind. As a result, today’s number will not change the conversation that the Fed is having about tapering asset purchases later this year.

For FX traders, the main question is whether today’s number will halt the aggressive decline in the U.S. dollar and put a bottom under USD/JPY. While the momentum is still to downside, the fact that the U.S. economy is creating more jobs is good news for the dollar. Since USD/JPY peaked on May 22nd, it has fallen about 6% and an unambiguously weak payrolls report would have been the nail in the coffin for the currency that would have almost certainly driven it below 95. However the data wasn’t unambiguously weak since the headline number actually beat expectations, triggering a relief rally in the greenback. The Bank of Japan also meets next week and there is a realistic possibility they will take additional action to stem slide in the Nikkei and rise in the Yen. This risk is yet another reason why anyone who has shorted USD/JPY down to 95 are now reversing their positions.

Meanwhile up north Canadian job growth was very strong. Canada added 95k jobs last month, the largest amount ever, sending the Canadian dollar sharply higher. To put this into perspective this would be akin to 900K jobs created in the U.S. economy if we adjusted for the population. Unlike the U.S., the unemployment rate also declined and the labor participation rate increased. For the Bank of Canada, who has a new central bank governor, the latest employment numbers will keep monetary policy steady and their bias on raising rates. Compared to the rest of the world, Canada’s economy is a shining star that will attract demand for the loonie. While the rally in the CAD against the USD is limited, the Canadian dollar hit a 2 year high against the Australian dollar on the back of today’s employment report.

Kathy Lien
Managing Director

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