Can the Jobs Data Give the Dollar Another Leg Up?
The US dollar is consolidating yesterday’s gains that were scored largely in response to Draghi’s revelation that QE and a negative deposit rate were discussed at the ECB meeting. The greenbacks gains have brought it to important technical levels. This is around $1.3700 for the euro, $1.6570 for sterling and JPY104 against the yen. Meanwhile, against the Canadian dollar, the greenback continues to absorb bids in front of C$1.10 for seven consecutive days.
The consensus expects that the US economy grew 200k jobs last month and that the unemployment rate ticked down to 6.6% from 6.7%. We suspect there is risk on the upside. Leaving aside the housing data and the manufacturing ISM, the recent pattern has been for economists to under-estimate the US data after generally being surprised on the downside during the first part of the year.
In addition, the ISM for the service sector saw a strong recovery, providing new information we did not have at the start of the week. Weekly initial jobless claims fell between reporting periods. And, the week that the non-farm survey was conducted in February was particularly unseasonable, while the week the survey was conducted in March was one of the better late winter periods. Lastly, some have cited the 8% rise in payroll withholding tax.
This is also the first jobs data post the March FOMC meeting, at which the FOMC dropped the 6.5% unemployment threshold. This warns that investors’ focus may shift from the unemployment rate too. Given Yellen’s comments, other components of the report may attract increased attention. Chief among these is the average hourly earnings. The 0.4% increase in February lifted the year-over-year rate to 2.2% and spurred some speculation of wage inflation. We have suggested that the hourly earnings data was skewed by the weather that produced a bit of a statistic quirk. That means the risk may be on the downside of the Bloomberg consensus forecast of a 0.2% increase.
The bottom-line here is that US economic growth picked up in late Q1. The labor market continues to improve, but only slowly. The Fed remains on its path of tapering $10 bln a month.
Canada also reports March jobs data. There is likely to be a significant improvement here too. In February, partly weather-related, Canada reported a 7k decline in employment. This overstated the weakness as full-time jobs grew by almost 19k. Later the IVEY PMI will be released. It is expected to show another modest increase. Good North American news could push the US dollar through the CAD1.1. The CAD1.0965 area offers the next level of support, but somewhat longer-term view warns of potential toward CAD1.08.
Today is also the first anniversary of the Bank of Japan’s “Qualitative and Quantitative Easing” policy. The effectiveness of it remains an open question, although the yen has fallen,and the stock market has risen. Most observers included those Japanese businesses participating in the Tankan survey, do not expect it to achieve its 2% inflation target. In addition, it is not spurring the increase in domestic investment that had been expected. Nor are base wages rising. With the BOJ buying so many JGBS, there is beginning to be more concerned about the shortage of government bonds as collateral, which are similar to the distortions seen in the US.
Over the past seven sessions, the dollar has risen from near JPY101.70, the middle of the February and March trading range to test the JPY104 area yesterday and today, which is the best level since late-January. Behind the yen’s weakness, we suspect its use as a funding currency on ideas 1) geopolitical risks have subsided; 2) there is not real risk of tighter monetary policies over the next 6-9 months; 3) US economy is likely to strengthen and US bond yields have risen in anticipation.
The New Zealand dollar has eclipsed the yen as weakest of the major currencies over the past five sessions, falling 1.4% (vs. 1.0%). This seems to be more a function of positioning as there has been little data and the Kiwi was at multi-year highs at the start of the week. The key reversal on Tuesday coupled with the continued decline in milk prices, its key export, began squeezing out longs after a 4.8% rally from early February through early April.