Dollar Soars – Labor Market is Back!

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The labor market is back and the U.S. dollar is rallying so expect a good day for risk and new highs for stocks. The U.S. dollar soared against all of the major currencies following better than expected labor market numbers. Non-farm payrolls increased 165K in the month of April and the unemployment rate dropped to 7.5%. Private sector job growth was very strong with last month’s exceptionally weak report revised up from 88K to 138K. Average hourly earnings also increased 0.2% last month, but even though this morning’s labor market report was solid and the feel good factor should last, the data was not unambiguously positive. Manufacturing payrolls were flat, average weekly hours declined and the broader U-6 unemployment rate increased to 13.9% from 13.8%.

Yet none of this matters because the sheer of relief that payrolls exceeded 150K will be enough to drive USD/JPY towards 100 and EUR/USD to 1.30 because it means that the Federal Reserve won’t need to consider increasing asset purchases. In fact, when the Fed said they could increase or decrease stimulus this week, we were extremely skeptical that they shifted their bias from the possibility of tapering asset purchase to increasing them especially since they left their assessment of the labor market unchanged. Their glass half full view of jobs is also one of the main reasons why we leaned toward a stronger number today.

Better than expected U.S. data stands in stark contrast to the European Commission’s lower Eurozone GDP forecasts. The EC now expects GDP growth in the region to contract by -0.4% compared to a previous estimate of -0.3%. The big change was for France whose economy is expected to contract by 0.1% instead of grow by 0.1%. The recovery in 2014 is also expected to be weaker, now estimated at 1.2% vs. 1.4% previously. For the EUR/USD, this means a test of 1.30 is likely but 1.2950 is key.

Meanwhile according to this morning’s comments from European policymakers, not everyone is on board with the idea of negative deposit rates. In early Europe, ECB members Nowotny and Liikanen said the market over interpreted the possibility of negative rates while Mersch said no major central bank has a negative deposit rate and the ECB has to be careful about unintended consequences. However closer to the North American open, Nowotny felt the need to clarify his stance because he was surprised by the reaction to his earlier comments and so he repeated Draghi’s view that they have an open mind about negative rates but it is “not imminent.” These back and forth comments from European policymakers signal that their primary goal yesterday was to appear to more flexible and willing to do more when in reality they are very cautious about any additional actions they plan to take.

Kathy Lien
Managing Director

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