Dollar Slips on Potential for Payrolls Miss

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The U.S. dollar is trading lower against all of the major currencies this morning on the back of weaker than expected labor market numbers. With less than 72 hours to go before the non-farm payrolls report, today’s data will help shape expectations for Friday’s big release. Based on the numbers received so far, we’re looking at the potential for a disappointment this month. Economists expect payrolls to rise by 198K in March compared to 236K in February. According to private payroll provider ADP, U.S. companies added only 158K jobs last month, down from an upwardly revised 237K. While the revision to last month’s report makes it seem like ADP does a very good job of forecasting NFP, their original estimate was 198K. Nonetheless, it can be relied on as a directional gage for the labor market. Non-manufacturing ISM also dropped to 54.5 from 56, signaling weaker growth in the service sector. Not only was this the largest disappointment in a year but the employment component dropped to a 4 month low of 53.3 from 57.2. Taken together, this is terrible for Friday’s payrolls report and signals the potential for a sizeable disappointment along with further dollar weakness.

Yet even with these weaker reports, there’s a tinge of optimism in the FX market today with European currencies trading higher. News that the IMF will contribute 1 billion euros to the Cyprus bailout was received warmly by EUR/USD traders while better than expected Australian trade numbers sent the AUD/USD soaring. Despite the latest sell-off in the dollar, the greenback is trading strong ahead of key events such as the BoJ, ECB and BoE meetings – lets not forget about non-farm payrolls. Much of this optimism has to do with the persistent records set in U.S. equities and the implications this has for confidence, business and consumer spending.

Of course the primary focus over the next 24 hours will be the Bank of Japan’s monetary policy decision. We will publish a more thorough note this afternoon but in the meantime, expectations are high for Kuroda’s first monetary policy meeting. Based on yesterday’s comments, Kuroda is open to scrapping the banknote rule, combining asset buys with riban and plans to ease boldly in quantity and quality. While we believe that the Bank of Japan won’t sit on their hands and will ease this week, in order for the Yen to weaken further they will need to over deliver in a very big way by doing all of the above and announcing an open ended bond buying program or at least serious plans to consider one. Will they be that bold? We’ll let you decide.

Kathy Lien
Managing Director

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