Why the Dollar Slipped After Non-Farm Payrolls

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This morning’s non-farm payrolls report gave the Federal Reserve very little to worry about and while it may be tempting to attribute the rally in the EUR/USD to the market’s satisfaction with the NFP report, the sell-off in USD/JPY suggests otherwise. Investors wanted a reason to doubt the Fed’s hawkishness, or desire to end asset purchases this year and the upward revision to the unemployment rate in November may have been enough to drive the dollar lower.

For the most part, labor market conditions held steady last month, as the unemployment rate remained unchanged at 7.8%. Non-farm payrolls increased by 155k which was slightly better than expected (150k) but marginally weaker than the previous report (161k) but investors weren’t fazed because November payrolls were revised up by 15k. Average hourly earnings also held steady at 0.3% after an upward revision to the November numbers. Nonetheless the U.S. dollar weakened after the release because the unemployment rate in December held steady only after the jobless rate in November was revised up from 7.7% on seasonal revisions. The main takeaway from today’s non-farm payrolls report is that U.S. labor market conditions remained unchanged in December and November was stronger than initially estimated. Over the past 6 months, monthly payrolls have averaged around 160k, which is solid but not spectacular job growth. The sell-off in the U.S. dollar indicates that with the unemployment rate increasing in November, investors believe that the Fed may not be as serious about ending QE3 in 2013 as the FOMC minutes may suggest.

While there were no major surprises in today’s U.S. non-farm payrolls report, labor market conditions in Canada blew out expectations once again. Economists were looking for zero job growth in December after very strong growth in November but Canadian companies added another 39.8k jobs, driving the unemployment rate down to 7.1%, its lowest level in 4 years. What made the release even more impressive was the fact that nearly all of the job growth was in full time work with strength seen in both the service and construction sectors. For the Bank of Canada, this solid employment report will validate their hawkish monetary policy stance and renew demand for the Canadian dollar.

Kathy Lien
Managing Director

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