Dollar Tanks on Payrolls, Here’s What’s Next

Daily FX Market Roundup 03.04.16

For the fourth time in five months, the U.S. economy added more than 200k jobs but the impact on the dollar was limited by the data’s influence on this month’s FOMC rate decision. As we said in yesterday’s note most Federal Reserve officials have their minds made about keeping interest rates unchanged in March and today’s jobs report reinforced the need for patience. While non-farm payrolls beat expectations by more than 40k, average hourly earnings fell -0.1% and average weekly hours declined. Yet the unemployment rate held steady at 4.9% and the labor force participation rate rose to its highest level in more than a year. So barring the drop in wages, the employment report was strong. The decline in wage growth is significant but after the sharp rise in January lower numbers for February are not unusual. For the Fed to raise rates in March today’s report needed to be unambiguously positive with major upside surprises in all of the subcomponents – unfortunately that did not happen. However we think there’s enough improvement in the jobs report for the Fed to maintain a hawkish bias, which should limit the dollar’s decline in the coming week especially since there are no major U.S. economic reports on the calendar.

Instead the EURO will be the main focus next week with the European Central Bank meeting on the calendar. Over the past month, policymakers have made it very clear that more needs to be done to counteract weak growth and low inflation. The actions taken in December, which included an extension to asset purchases and lower interest rates failed to reverse sentiment and kick start the economy. Instead the euro rose more than 4 cents off its pre-easing levels, offsetting a large part of the central bank’s stimulus. With consumer prices falling -0.2% in February, there’s no doubt that more needs to be done. However the ECB under delivered in December and the risk is that the same will occur in March. Yet along those lines, they could opt to be more proactive knowing how the market interpreted their last action. The only consensus right now is for a 10bp deposit rate cut. If that’s all they deliver, investors will express their disappointment by driving EUR/USD higher. If the ECB surprises the market by stepping up Quantitative Easing and increasing the amount of assets purchased, the euro will fall quickly and aggressively.

There are 2 additional monetary policy announcements in the coming week from Canada and New Zealand. Recent improvements in Canadian data along with the recovery in oil prices drove USD/CAD to a 3 month low. When they last met, the Bank of Canada left rates unchanged with Governor Poloz being surprisingly optimistic. He was not concerned about a global recession and believes that the weak Canadian dollar will aid growth. Poloz was also encouraged by the economy’s resilience and flexibility and instead of lamenting about the currency’s rapid decline, he said a further fast fall could boost inflation. This month he has even less to be worried about with oil near $35 a barrel, GDP growth accelerating and consumer prices rising but Canada is not out of the woods as consumer spending and labor market conditions remain weak. The latest Canadian economic reports were mixed with the country’s trade deficit widening much less than anticipated. Manufacturing activity slowed significantly according to IVEY PMI after the sharp rise in January.

The New Zealand dollar finally broke out of a month long range but the break has not been particularly impressive. With no New Zealand economic reports released today, the move was driven by U.S. dollar weakness and higher commodity prices. Like the Bank of Canada, the Reserve Bank of New Zealand has far less to be worried about in March compared to January. Dairy prices finally edged higher, manufacturing activity is improving, credit card spending is on the rise, the unemployment rate fell sharply and the trade deficit returned to surplus. The last time we heard from the RBNZ they said further NZD depreciation would be appropriate and further easing may be needed over the coming year. However the lower value of NZD versus AUD and the recovery in commodity prices should have eased their concerns this month.

The Australian dollar continued its march upwards, rising to its strongest level since August despite slightly weaker retail sales. Consumer spending rose 0.3% in the month of January versus a forecast of 0.4%. Even with this miss spending in January was significantly higher than December, which was enough for AUD bulls to send the currency pair higher. It has been a great week for the Australian dollar, which rose 2.8% against the U.S. dollar and 3.7% against the Japanese Yen. Unlike some other countries, the rally in the currency is genuinely supported by economic data, which is why AUD/USD could extend to at least 75 cents. The only thing investors need to be mindful of is how the central bank views the currency. We know they prefer AUD/USD to be trading closer to 65 cents and given that we are nearly 1000 pips away from that level, there’s a risk of currency related comments from RBA officials.

Lastly sterling traded higher for the fifth day in a row.
The resilience of the British pound is remarkable considering the weakness of U.K. data. Service and manufacturing sectors grew at their slowest pace in nearly 3 years while the construction sector expanded at its slowest in 10 months. Yet sterling continues to rise, taking out 4 big figures this past week. A lot of this has to do with positioning as sterling became deeply oversold but concerns about Brexit also appear to be easing. There’s been no specific headlines or polls to suggest that the risk has diminished but the price action in the currency certainly suggests this thinking.

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