FX Trends Intact, Main Takeaway from NFP

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The non-farm payrolls report always creates excitement for the financial markets but as anticipated, it ended up yielding very little reaction in the U.S. dollar. The data fell short of expectations with job growth slowing to 157k from an upwardly revised increase of 196k the prior month and the unemployment rate increased from 7.8% to 7.9%. This disappointment drove the dollar slightly lower against all of the major currencies but posed no major threat to the overall uptrend in the EUR/USD and USD/JPY.

Investors did not have a more exaggerated reaction because non-farm employment was revised sharply higher in October, November and December. The rise in the unemployment rate is concerning but the main takeaway from today’s report is that payrolls have been steady with no major acceleration or deterioration. The U-6 unemployment rate, which is considered a broader measure of the labor market than the official number that is reported was also unchanged last month. So while the Federal Reserve won’t be happy to see job growth slow, the rise in the unemployment validates their plans to keep monetary policy easy for the foreseeable future. With the Fed now targeting a 6.5% unemployment rate, the spread between the current level of joblessness and the central bank’s target has widened. Average hourly earnings growth also slowed to 0.2% from 0.3% while average weekly hours remained unchanged at 34.4. Private sector payroll growth was slightly stronger at 166k as cuts in government jobs reduce the overall headcount increase.

At the end of the day, the factors behind the relentless rally in the EUR/USD and USD/JPY haven’t changed. Eurozone economic data continues to beat expectations thanks to better than expected growth in Germany. The ECB is also beginning to reduce stimulus through LTRO repayments and as they continue to do so, liquidity in the Eurozone will decline at a time when the Fed will keep monetary policy unchanged, which will be positive for the EUR/USD. Compared to Japan who will shift to open ended asset purchases next year and is expected to increase asset purchases this year when the new BoJ Governor takes office, steady monetary policy in the U.S. makes the dollar more attractive versus the Yen.

Based on the dollar’s reaction to the non-farm payrolls report, traders are not overly concerned about today’s miss in NFPs and the sharp recovery in S&P futures confirms that the equity traders share this view. The final January University of Michigan Consumer Confidence report is scheduled for release later this morning followed by U.S. construction spending and ISM manufacturing.

Kathy Lien
Managing Director

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