Friday’s US non-farm payrolls (NFP) report disappointed already deflated expectations and sent the US dollar careening lower against key counterparts like the euro and Japanese yen (JPY).
Between today's non-farm payrolls (NFP) report and yesterday's European Central Bank (ECB) and Bank of Japan (BoJ) meetings, it has been a rock-and-roll week in the forex market. Volatility picked up significantly, with breakouts seen in many currency pairs.
This morning, USDJPY spiked to fresh year-to-date highs, taking out the 97.00 figure in morning Tokyo dealing, but then fell sharply due to profit taking and dropped through the 96.00 handle before stabilizing in early-European trade.
The wild fluctuations were driven in part by the sharp moves in Japanese government bonds (JGBs), which saw yields drop to record-low levels before rebounding. Bank of Japan Governor HaruhikoKuroda reiterated his view that the central bank’s primary task was to defeat deflation, which he termed as being abnormally long, but he also acknowledged that the aggressive new monetary policy could stoke an asset bubble and promised to be vigilant in suppressing any such developments.
The blowout moves in USDJPY continue to be driven by tectonic shifts in Japan's monetary policy, but the rally is now in jeopardy on the heels of abysmal US employment data.
See related: 2 Major FX Rallies in Danger Today
Ultimately, USDJPY trades on the spread between Japanese government bonds (JGBs) and US Treasuries, and with Japanese yields well below 1%, there is little room left for JGBs to appreciate further. That means that the only way the pair could sustain its rally is if US yields begin to rise, thus widening the spread. That, in turn, depends on continued US growth, which in the face of today’s NFP data, may not be forthcoming.
Dollar Tanks on US Non-Farm Payrolls (NFP) Data
There were a lot of reasons to believe that US labor data would miss badly this month, most notably the near-five-point decline in the employment component of the ISM services report, which tends to be one of the better forecasters of the NFP number.
In fact, the market was already primed for a lower reading. This morning, however, the NFP report showed that job growth last month in the US was abysmally weak. US 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. Even 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.
The EURUSD broke above 1.30 on the back of the release, while USDJPY dropped below 96. Although 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.
USDJPY, on the other hand, has other forces driving it higher, and as a result, it’s likely to be less affected by the non-farm payrolls report this month.
For the Federal Reserve, this morning's jobs numbers will push out the 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.
Nonetheless, one monthly decline does not constitute a trend, especially when it comes after a very strong month in February. From here, next week's retail sales report will be crucial. 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 money. Lost in the shuffle was the trade balance, which narrowed from -$44.5B to -$43B in February.
Canada Reports Lousy Job Numbers, Too
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 (BoC) has some fresh headaches on its hands. This is very bad news for Canada, and in many ways, it’s worse than the US job numbers because of size of the Canadian economy. USDCAD has broken to the upside, and we think that a test of the 1.03 level is upcoming.
By Boris Schlossberg and Kathy Lien of BK Asset Management