How Will the Dollar React to Payrolls

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Daily FX Market Roundup 04-03-14

How will the Dollar React to Payrolls

EUR Crashes – Top 10 Takeaways from ECB Meeting

GBP: Has UK Growth Peaked?

CAD: Holds Onto Gains as Investors Look Ahead to Canadian Jobs Data

NZD: Sting of Lower Milk Prices Extends Losses

AUD: Hit by Weaker Retail Sales and PMI Services

JPY: Service Sector Rebounds but Foreign Investors Dump Stocks

How will the Dollar React to Payrolls

Based on today’s price action in the foreign exchange market, currency investors are positioned for a strong non-farm payrolls report. However not all investors are as confident with stocks pulling back from record levels and Treasury yields declining. The bar is set high for this month’s release with economists looking for U.S. companies to add 200k jobs and for the unemployment rate to fall from 6.7% to 6.6%. We believe that payrolls will meet if not exceed the market’s expectations, providing a further boost to the dollar. Every month we take a look at 8 labor market indicators to help us determine whether NFPs will rise or fall. The most important is the employment component of the non-manufacturing ISM report, which rebounded sharply last month. Although this report failed to predict the rise in payrolls in February, historically it has a very strong correlation with the non-farm payrolls report and this month it tells us U.S. companies added workers at a more aggressive pace. Layoffs are also down according to Challenger Grey & Christmas and private payroll provider ADP reported an increase in corporate payrolls. Weekly jobless claims have been very low with the 4-week moving average falling sharply to 319.5k. While confidence has been mixed with the University of Michigan Consumer sentiment index falling slightly, the survey conducted by the Conference Board found sentiment at its highest level in 6 years. The only area of concern is in the manufacturing sector where job growth slowed. With nearly all of the leading indicators for payrolls pointing to a strong release, we have every reason to believe that tomorrow’s report will be positive for the dollar. However how positive will depend on the scope of the upside surprise. Almost everyone thinks payrolls increased last month because jobless claims have been low, weather related distortions faded and the Federal Reserve tapered asset purchases in March. If payrolls rise by less than 150k, the dollar will weaken and 104 should become the top for USD/JPY. If payrolls increase by 225k or more, USD/JPY will make a run for 105 but if it comes in anywhere between 195k and 220k, the impact on the greenback would be small but still positive. Keep an eye on revisions as well because it could also affect the dollar’s reaction.

Here’s how the leading indicators for NFPs stack up this month:

Arguments for Stronger Payrolls

1. Sharp Rise in Employment Component of Non-Manufacturing ISM

2. Conference Board Confidence Index Hits 6 Year Highs

3. ADP Employment Change Rises to 191k form 178k

4. Challenger Job Cuts Fall 30.2%

5. 4 Week Average Jobless Drops Steeply to 319.5k

6. Continuing Claims at 2.836 million, down from 2.907 million

Arguments for Weaker Payrolls

7. Drop in University of Michigan Consumer Sentiment Index

8. Employment Component of Manufacturing Declines

EUR Crashes – Top 10 Takeaways from ECB Meeting

After leaving interest rates unchanged this morning, the European Central Bank is doing everything in their power to talk down the euro this morning and based on the price action of the currency, investors are hearing them loud and clear. While Mario Draghi said the late Easter could be clouding the data and causing the weakness in March, he spent most of his press conference talking about the possibility of additional easing and outlining the ways they could increase stimulus. He was unusually specific in saying that Quantitative Easing, another rate cut, negative deposit rates and a narrower rate corridor were all discussed at the meeting. For the first time this year, Draghi also shared his greatest fear, which is stagnation. These comments alone tell us that there’s no question that the ECB’s primary goal today was to harden their dovish bias. We still think the bar for additional easing is high because the central bank did not see an intensification of deflation and expects price pressures to pickup in April. However this may not stop the euro from falling as the ECB is looking to increase stimulus at a time when the Federal Reserve is reducing the amount of support provided to the U.S. economy on a monthly basis. Here are our Top 10 Takeaways for the ECB Rate Decision and their implications for the euro. While it may appear that the EUR positive comments offset the negatives, Draghi’s emphasis on the possibility of more stimulus is the most important takeaway from today’s comments.

Top 10 Takeaways from April ECB Meeting


GBP: Has UK Growth Peaked?

While many investors expect the Bank of England to be the next central bank to raise interest rates, it will be difficult for them to do so with manufacturing, service and construction activity slowing. Optimists will argue that the absolute level of each PMI index is very high but the central bank has not been eager to drop its dovish bias when the PMIs where improving, let alone deteriorating. The latest economic reports from the U.K. including today’s PMI services index, which fell to a 6 month low confirms U.K. growth peaked at the end of last year. This does not preclude the possibility of faster in growth in the second quarter of 2014 but for the time being, investors have to acknowledge that the U.K. economy is not doing as well now as the second half of last year. This fact should encourage traders to take profits on their long GBP/USD positions. There is a head and shoulders pattern forming on the daily charts that also signals the potential for a deeper correction in the British pound. However the bulls may not give up so easily after today’s speech from Bank of England Governor Mark Carney. According to our colleague Boris Schlossberg “Earlier in the day several BoE governors including Mark Carney stated that a rate hike could happen before the next general election, which is scheduled to take place sometime in May of 2015. Mr. Carney reiterated that the BoE will not be subject to political considerations and will act appropriately on the monetary front as conditions demand. Yet much of the speculation regarding interest rate hikes from the BoE rests on the assumption that UK economy will continue to grow at its current pace.”

CAD: Holds Onto Gains as Investors Look Ahead to Canadian Jobs Data

The Australian and New Zealand extended their losses against the greenback while USD/CAD held steady above 1.10. A healthier trade balance supported the Canadian dollar which ended the day unchanged. Canada’s deficit returned to surplus in February but with the downward revision in January, the impact on the loonie was minimal. Tomorrow’s Canadian employment numbers will be significantly more market moving for the CAD and after the surprise decline in jobs, a rebound is expected. Meanwhile there was no data from New Zealand but the sting of this week’s decline in milk prices along with softer data from the region added pressure on the currency. Milk powder represents 30% of New Zealand’s exports and the decline in prices can have a direct impact on the value of trade activity. If not for the positive surprise in Australia’s trade balance, AUD would have probably traded much lower. The country’s surplus was expected to shrink to 800M but instead dropped only to 1.2 billion from 1.392 billion. Unfortunately given the decline in Chinese demand and the fall in iron prices last month, this improvement could fade quickly, leaving Australia with other softer economic reports. The PMI services index dropped from a near 6 year high of 55.2 to 48.9 in March. It is a bit surprising that RBA Governor Stevens can maintain a glass half full view of the economy with manufacturing AND service sector activity contracting last month. Retail sales also grew 0.2%, which was significantly weaker than the previous month when demand rose 1.2%. According to the Chinese government’s official report, service sector activity in China also grew at a slower pace but a private survey by HSBC found service sector activity improving. Either way, these reports indicate that the domestic and external environment for Australia has weakened which could trigger additional profit taking in the currency.

JPY: Service Sector Rebounds but Foreign Investors Dump Stocks

While USD/JPY held onto its gains ahead of non-farm payrolls, the rest of the Yen crosses traded lower. The worst performer was NZD/JPY, which was dragged down by the persistent weakness in NZD and the best performer was CAD/JPY, which was lifted by stronger trade data. The Nikkei extended its gains overnight on the back of positive economic data. According to the PMI index, which rose to 52.5 from 49.3, services sector activity expanded in the month of March after contracting in February. The dip in the second month of the year was the first move into contractionary territory since September 2012 and the snap back was necessary for the story of recovery in Japan to continue. Unfortunately earlier this week, Markit/JMMA reported that manufacturing activity which drives Japan’s economy dropped for the second straight month. So far, investors are taking the consumption tax in stride, which is consistent with how Japanese assets performed at the start of the year. The Ministry of Finance also released its weekly portfolio flow report and the details show foreign investors selling Japanese stocks for the third month in a row. As we indicated in past weeks, this could be a sign of concern about the future of Abenomics.

Kathy Lien
Managing Director

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