The US Dollar may decline as markets reconsider their initial reaction after Friday/s jobs report and unwind expectations for an early end to Fed stimulus efforts.

Talking Points

• Australian, New Zealand Dollars Fall on Worrying Chinese Economic Data
• Japanese Yen Sold as Firming Risk Trends Weigh on Funding Currency
• US Dollar May Turn Lower as Traders Rethink Implications of NFP Report

The Australian and New ZealandDollars opened the trading week lower as expected in the wake of Chinese CPI figures released over the weekend. The report showed the year-on-year inflation rate unexpectedly accelerated to 3.2 percent in February, marking the highest reading in 10 months. This appeared to fuel concerns about on-coming policy tightening that slows Chinese growth, eroding the outlook for demand from a crucial market for Australian and New Zealand exporters.

The Japanese Yen edged lower as Asian stocks advanced, with the risk-on mood driving demand for carry traders funded cheaply in the perennially low-yielding currency. The MSCI Asia Pacific regional benchmark equity index added 0.7 percent as traders took their turn to respond to Friday’s better-than-expected US employment report.

Looking ahead, a relatively quiet economic calendar in European hours and an empty one in the US leave the door open for risk appetite trends to remain at the forefront. Most notably, this seems to open the door for a downward correction in the US Dollar. The greenback rose on Friday as an unexpected decline in the unemployment rate drove expectations that the Fed may get to its 6.5 percent threshold on the jobless rate faster than previously expected, prompting an early end to its quantitative easing efforts. That seems unlikely however.

The jobless rate fell 0.8 percent (from 8.9 to 8.1 percent) in 2012 against a backdrop of accelerating economic growth. By contrast, output is expanded to expand at a slower pace in 2013 as tax hikes and “sequester” spending cuts kick in. With that in mind, economists reasonably expect the decline in the jobless rate to be a smaller 0.4 percent this year. That would bring headline unemployment to 7.7 percent, a far cry from the Fed’s line in the sand.

On balance, this clears the way for traders to rebrand Friday’s NFP result as something supportive for risk appetite but detrimental to the Dollar. Indeed, lingering QE stands to paint the benchmark unit as a funding currency occupying a similar place in the G10 FX universe as the Japanese Yen, pointing to weakness in an environment where carry demand rises long with share prices.

Asia Session:

Euro Session:

Critical Levels:

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow Ilya on Twitter at @IlyaSpivak

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