It is a quiet week in the financial markets when the weekly jobless claims report is the most important piece of U.S. data on the calendar. Over the past few years, the impact of jobless claims on currencies has diminished, as fewer firings have not translated into stronger hiring. However with the Federal Reserve’s eyes transfixed on the labor market, the continued decline in claims eases concerns about a retrenchment in jobs. According to the latest report, claims dropped to a 5 year low of 323K from 327K for the week of April 27th. Continuing claims also fell to 3.005 million, down from 3.032 million.

The timing of the drop in claims couldn’t better for the U.S. dollar. The Federal Reserve was surprisingly optimistic at their last monetary policy meeting and their sentiment was confirmed by the stronger non-farm payrolls report and now the improvement in claims suggests that May payrolls will be solid as well. This will keep discussions of tapering asset purchases going inside the Fed, which should help dollar at a time when other major central banks are actively weakening their currency through lower interest rates or currency intervention.

While the good jobless claims report has helped to boost the greenback, the dollar is still mixed this morning – trading higher against the EUR, CHF and CAD but lower against the JPY, AUD and NZD. Today is one of those days when underlying fundamentals of G7 nations are driving currency flows and not the market’s appetite for U.S. dollars. The euro for example topped out below 1.32 and has trickled lower since then. The euro barely reacted to the ECB Monthly Report and instead pulled back alongside European equities.

The GBP, AUD, and NZD on the other hand benefitted from solid economic reports although the GBP gave up earlier gains after the jobless claims numbers. With less to worry about now that economy is beginning to improve, the Bank of England left interest rates unchanged. Industrial production rose 0.7% in March while manufacturing production jumped 1.1%. If U.K. economic data continues to surprise to the upside, the central bank will have less to worry about. Australia and New Zealand on the other hand reported unambiguously positive employment numbers that sent their currencies soaring but the gains may be limited given the recent actions by the RBA and RBNZ to weaken their currencies.

South Korea Joins Currency War

Finally it is worth noting that South Korea joined the currency war last night by cutting interest rates 25bp to 2.5 percent. In the past we have said that South Korea is a country that will be hurt significantly by Yen weakness. While they cited “sluggishness of economic activities in the euro area” and “weaker than initially anticipated” Chinese growth, the fact that the Korean Won hit a 5 year high versus the Japanese Yen is a strong motivation for them to ease because South Korean companies are major competitors of Japanese corporations in many export markets.

Looking ahead, we expect stocks to reach new highs today on the back of the jobless claims report which should limit the slide in currencies.

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