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Jobs Data Dollar Bulls (and the Fed) Will Love

Jobs Data Dollar Bulls (and the Fed) Will Love

Kathy Lien, Technical Strategist

Today’s US jobless claims report was positive for the dollar and will likely keep the Fed’s focus on tightening monetary policy at a time when other central banks are engaged in a race to devalue their currencies.

In this quiet week for the financial markets, today’s weekly jobless claims report is the most important piece of US data on the economic calendar. Over the past few years, the impact of jobless claims on currencies has diminished, as fewer firings have not translated into stronger hiring. However, with the Federal Reserve's eyes transfixed on the labor market, the continued decline in claims eases concerns about a retrenchment in jobs.

According to the latest report, jobless claims dropped to a five-year low of 323K (from 327K) for the week of April 27. Continuing claims also fell to 3.005 million, down from 3.032 million.

The timing of the drop in claims couldn't be better for the US dollar. The Federal Reserve was surprisingly optimistic at the last monetary policy meeting, and the positive sentiment was confirmed by the stronger non-farm payrolls (NFP) report. Now, the improvement in jobless claims suggests that May payrolls will be solid as well.

This will keep discussions about tapering asset purchases alive inside the Fed, which should help the dollar at a time when other major central banks are actively weakening their currencies by way of lower interest rates or even direct currency intervention.

While the favorable jobless claims report has helped to boost the greenback, the dollar is still mixed overall, trading higher against the euro (EUR), Swiss franc (CHF), and Canadian dollar (CAD), but lower against the Japanese yen (JPY), Australian dollar (AUD), and New Zealand dollar (NZD).

We expect stocks to reach new highs today on the back of the jobless claims report, which should limit the slide in currencies.

Key Fundamental Drivers of Currency Flows

Today is one of those days when underlying fundamentals of G7 nations are driving currency flows instead of the market's appetite for US dollars. The euro, for example, topped out below 1.32 and has trickled lower since then. The euro barely reacted to the latest monthly report from the EuropeanCentral Bank (ECB) and instead pulled back alongside European equities.

The British pound (GBP), AUD, and NZD, on the other hand, all benefitted from solid economic reports, although GBP gave up earlier gains after the jobless claims numbers. With less to worry about now that the UK economy is beginning to improve, the Bank of England (BoE) predictably left interest rates unchanged. UK Industrial production rose 0.7% in March, while manufacturing production jumped 1.1%.

Australia and New Zealand, on the other hand, reported unambiguously positive employment numbers that sent their respective currencies soaring, but the gains may be limited given the recent actions by the Reserve Bank of Australia (RBA) and Reserve Bank of New Zealand (RBNZ) to weaken their currencies.

South Korea Joins the “Race to Debase”

Finally, it is worth noting that South Korea joined the ongoing “Race to Debase” last night by cutting interest rates 25 basis points (bps) to 2.5 percent.

In the past, we have said that South Korea is a country that will be hurt significantly by weakness in the Japanese yen. While citing "sluggishness of economic activities in the euro area" and "weaker-than- initially-anticipated" Chinese growth, the fact that the Korean won (KRW) hit a five-year high versus the yen is a strong motivation for easing because South Korean companies are major competitors of Japanese corporations in many export markets.

By Kathy Lien of BK Asset Management

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.