The March non-farm payrolls report was good but not good enough to renew demand for U.S. dollars. Non-farm payrolls rose 215K, which was slightly more than expected and average hourly earnings increased 0.3%, but investors were disappointed by the increase in the unemployment rate. As we noted in yesterday’s report, today’s labor market numbers needed to be unambiguously positive to draw investors back to the dollar and unfortunately underlying weakness prevented the dollar from rallying. The market’s overall reaction to the non-farm payrolls report was muted because the benign release changes nothing for the Federal Reserve. The higher unemployment rate confirms that more improvements need to be seen before the Fed can pull the trigger on raising rates. The increase in the jobless rate guarantees that rates will remain unchanged in April and unless the next 2 retail sales and/or earnings reports show big improvements, monetary policy will be held steady in June as well.
Does this mean that the dollar is doomed? No. We’ve seen significant improvement in the unemployment rate for the past year and a temporary increase is not unusual and may even be encouraging because of the uptick in the labor force participation rate. More Americans are rejoining the workforce looking for new jobs and hopefully that means they feel more confident about the outlook for the U.S. economy. Also the rest of the report was strong and consistent with continued improvement in the labor market. In other words, while USD/JPY dipped below 112 after the NFP report, today’s release does not justify a crash in the dollar. This view is confirmed by the rise in the ISM manufacturing index and upward revision to consumer sentiment. We see the latest reports as reasons to buy USD/JPY anywhere on the 111 handle for a move back towards 113. For the coming week and probably weeks beyond, we expect USD/JPY to remained confined within a 110.50 to 114 range. Last night’s Japanese Tankan report showed broad based deterioration in manufacturing and non-manufacturing confidence. Sentiment dropped to its lowest level since mid 2013 as a strong yen and slower global growth crimp the country’s recovery. More importantly, Japanese businesses plan to cut production, which will increase the need for more BoJ stimulus.
While we continue to look for EUR/USD to test 1.1500, the pair is vulnerable to pullback to 1.13 before another push higher. Eurozone PMI manufacturing numbers were revised up for the month of March thanks to improvements in the German economy but recent economic reports have been mixed. Next week’s economic calendar contains more German releases along with the minutes from the last ECB meeting. On a short-term basis the U.S. dollar is oversold and a post payrolls relief rally in the coming week could also give traders the opportunity to buy euros at a lower level.
The worst performing currency today was sterling, which fell sharply against the U.S. dollar and euro. The latest decline drove EUR/GBP rose to its strongest level since November 2014. You may remember that in yesterday’s note, we said sterling was losing its positive momentum and that on a fundamental plus technical basis we were looking for GBP/USD to drop to 1.42. This target was reached on the back of a lower than anticipated manufacturing PMI report. Although manufacturing activity accelerated in March, investors expected more. Traders also shrugged off the sharp rise in house prices reported by Nationwide. If you are familiar with trading sterling you will know that big moves tend to have continuation so the next stop for GBP/USD could be 1.4050. The first area of resistance in EUR/GBP is near 0.8065 but we would not be surprised to see this move extend as high as 82 cents. The more important U.K. PMI Services report is scheduled for release next week along with industrial production.
USD/CAD raced above 1.3100 on the back of lower oil prices but data from Canada continues to surprise to the upside with RBC’s Canadian Manufacturing index rising sharply in the month of March. Aside from hitting a 14 month high, the index showed the first expansion in manufacturing activity since July 2015. Next week is an important one for Canada with the trade balance, IVEY PMI and employment numbers scheduled for release. The divergence between the trend of data and the trend of oil makes trading USD/CAD difficult for the time being. We will keep you posted it outlook becomes clearer.
After hitting multi-month highs the Australian and New Zealand dollars dropped versus the greenback today. The “good enough” U.S. labor market report and dip in commodity prices contributed to the pullback and allowed the commodity currencies to ignore stronger regional economic reports. Manufacturing activity in Australia grew by its strongest pace since 2004, confirming how well the country is weathering the stronger currency and the slowdown in China. Chinese data also surprised to the upside with manufacturing activity expanding for the first time in 8 months according to the government’s official release. Increases were also reported in the non-manufacturing sector. Although the Caixin index still sees a contraction, a sharp improvement was also reported. The Reserve Bank of Australia is scheduled to meet next week and these reports will help to ease any concerns they may have about AUD/USD reaching 9 month highs.