The US dollar rallied in response to news that US non-farm payrolls (NFPs) for the month of July fell by only 247,000, the least since August 2008. NFPs had been forecasted to fall by 325,000, and while the results still reflect the nineteenth straight month of job losses, they also show that the extent of the decline has been easing steadily since the start of the year. Adding to the positive news, the unemployment rate fell to 9.4 percent from 9.5 percent.
The US dollar’s reaction was interesting in that we haven’t seen fundamental forces drive the currency since June 5, which was the last time we saw a surprising strong NFP result, as the greenback has generally traded as a “safe haven” asset in recent months (gaining during times of risk aversion and stock market losses while losing at times of improved investor sentiment). This was primarily due to the fact that Treasuries responded so sharply to the news, with 10-year yields surging 10 basis points to 3.854 percent. A continuation of this dynamic bodes well for US dollar bulls, as US economic data has generally suggested that the contraction slowed during Q2.
Meanwhile, the JPY crosses haven’t come close to losing their link with risk trends, as the Japanese yen was the weakest of the majors on Friday, plunging more than 2 percent against the New Zealand dollar and US dollar while falling over 1 percent versus the Canadian dollar, Australian dollar, and British pound. At the same time, the S&P 500 broke above key resistance at 1,008 and ended the day up 1.34 percent at 1010.48. While the divergence between the low-yielders is quite obvious today, we need more than one day of price action to call it for sure.
Looking ahead to next week, traders will be watching the release of the Federal Reserve’s rate decision and US advance retail sales. On August 12, the Federal Open Market Committee (FOMC) is widely expected to leave the fed funds target range at 0.0 percent - 0.25 percent, but the statement could spark heavy volatility if the FOMC announces an expansion of their QE efforts or an elimination of them. Generally, signs that the central bank may increase Treasury purchases have been negative for the US dollar, but indications that they will complete the program within the next month or so could send the greenback spiraling higher. On August 13, retail sales may rise by 0.5 percent for the month of July July, which would mark the third straight improvement and add to evidence that the economic recovery may be on the way.
Related Article: US Nonfarm Payrolls Report Sends Japanese Yen Lower - Why?
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