Job Losses Soar and Dollar Follows – Here’s Why
Daily FX Market Roundup April 3, 2020
It has been another good week for the US dollar. The greenback traded higher against all of the major currencies on Friday despite abysmal non-farm payroll numbers. According to the latest report, the hemorrhaging in the labor market started before any state issued stay at home orders. In the first 2 weeks of March, US businesses shed 701k jobs, 700% more than economists anticipated. While everyone believes that millions of jobs have been cut in the past few weeks, no one expected such a shockingly large number this early. Economists were only looking for payrolls to fall by -100K especially after ADP reported only -27K reduction in private payrolls. However the leisure and hospitality industry accounted for more than half of the job losses as businesses began to cancel conferences and meetings in late February. The unemployment rate jumped to 4.4% as the household survey reported a 3 million decrease in employment. Average hourly earnings increased but with reports of non-furloughed workers taking pay cuts, that improvement will evaporate quickly. Service sector activity also slowed with the non-manufacturing ISM index falling to 52.5 from 57.3 In March but this number was much better than expected (the forecast was 43).
Stocks traded sharply lower but the greenback continued to draw its strength from risk aversion. There may be 257,773 COVID-19 cases in the US but the numbers in Spain and Italy have topped 110,000 and parts of Asia where it seemed like the virus was contained are now reporting new cases and resorting to stronger lockdown measures. There is a growing fear that there will be new flareups abroad along with a deepening economic crisis.
In the US, everyone is looking for data to worsen. If March payrolls were this bad, one can only imagine how ugly the April figures will be. We could be looking at non-farm payrolls falling by the millions. According to jobless claims, approximately 10 million people filed for unemployment benefits at the end of March. The whole country did not go into full lockdown mode until the middle of the month and with the President extending federal distancing guidelines through the end of this month, more Americans will be out of work for longer periods of time. We won’t see the true extent of COVID-19 impact on the US economy until next month. The only major US economic reports on next week’s calendar will be inflation data and the FOMC minutes. All of these reports should be negative for the dollar as the sharp decline in oil prices and the strong dollar could drive inflationary pressures lower. The FOMC minutes will highlight the central bank’s recent easing measures and their willingness to do more.
Sterling sold off the most on Friday on the back of weak PMIs. The service sector index dropped to 34.5 from 35.7, while the composite index fell to 36 from 37.1. The country’s coronavirus death count rose by the biggest daily amount yet and their delayed response could lead to a bigger social toll. The manufacturing index hasn’t seen a big decline but its only a matter of time before it will. The UK will most certainly be one of the countries hit the hardest by COVID-19. Its number eight on the list now for confirmed cases. EUR/USD extended its slide for the fifth straight day on downwardly revised PMIs.
The Australian and New Zealand dollars also extended their slide. China reported stronger PMIs but investors shrugged off the reports as they are measured against the prior month. Australia’s construction PMI index fell further while the services and composite reports were revised lower. Investors shrugged off the increase in retail sales as spending will certainly contract in March and April. Although it will be impossible for Australia’s economy to recover before the rest of the world, there’s early evidence that the country’s curve is flattening. The RBA meets next week and while no changes are expected, the central bank’s dovish bias will remain intact. In contrast, thanks to a strong recovery in oil, the Canadian dollar experienced only minor losses. USD/CAD will be in focus next week with IVEY PMI and Canadian labor market numbers scheduled for release.