Dollar Tanks on Payrolls Sticker Shock

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Between today’s non-farm payrolls report and yesterday’s ECB/BoJ meetings, it has been a rock and roll week in the FX market. Volatility picked up significantly with breakouts seen in many currency pairs. Job growth last month in the U.S. was abysmally weak. U.S. companies added only 88k jobs in March, the smallest increase since June 2012. While the unemployment rate dropped to 7.6% from 7.7% and February numbers were revised up to 268K from 236K, the sticker shock of the sub 100k print sent the dollar tumbling. The improvement in the unemployment rate is misleading because the participation rate, which measures the number of people employed or actively looking for a job hit a 30 year low.

EUR/USD broke above 1.30 on the back of the release while USD/JPY dropped below 96. While the dollar has rebounded off its lows post release, we still expect it to trickle lower throughout the North American trading session, particularly against the Euro. USD/JPY on the other hand has other forces driving it higher and as a result is not as affected by the non-farm payrolls report this month.

For the Federal Reserve, this morning’s jobs numbers will push out their timeline for varying asset purchases because a decline like the one seen today is the exact reason why the central bank is concerned about the sustainability of labor market improvements. Yet one monthly decline does not constitute a trend especially when it comes after a very strong month in February. Next week’s retail sales report will be key. If consumer spending increases, the central bank may look past this month’s decline in job growth. The manufacturing sector cut 3K jobs and losses were also seen in the public sector as private payrolls increased 95k. Average hourly earnings were flat but average weekly hours increased – in other words, Americans are working longer and not making more. Lost in the shuffle was the trade balance, which narrowed from -$44.5B to -$43B in February.

Canada’s labor market numbers were equally abysmal. The 54K decline in employment last month erased all of the jobs gained in February. Not only was this the largest drop in jobs since February 2009 but the unemployment rate also jumped to 7.2% from 7%. Combined with the surprise increase in the February trade deficit from -0.75B to -1.02B, the Bank of Canada has some fresh headaches on its hands. This is very bad news for Canada and in many ways worse than the U.S. job numbers because of size of the economy. USD/CAD has broken to the upside and we think that it test 1.03.

Kathy Lien
Managing Director

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