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Talking Points:

- Job growth came in well above expectations as the labor force continued to improve.

- The unemployment rate (U3) stayed constant as the labor force participation rate increased.

- USD/CAD spikes higher as greenback strengthens on the news; EUR/USD falls.

The past few months have rather volatile for job growth, but the July report should help assuage recent fears. After discouraging labor data in April and May, the June US jobs report came in blisteringly hot at +287K, the fastest rate of the year (and the highest since October 2015). While job growth ‘slowed’ on a month-to-month basis, today’s data confirms that the trend has picked back up to the topside. July job growth came in at +255K, beating expectations of +180K, compared to +287K last month.

Elsewhere, the unemployment rate (U3) was steady at 4.9%. The unemployment rate held steady despite the strong job growth because the labor force participation rate also rose, from 62.7% to 62.8%. This report was strong throughout, marked by higher wage gains as well. The only small disappointment was thuptick in underemployment to 9.7% from 9.6%, but this too can be attributed to the increase in labor force participation rate.

With jobs growth shrugging off Q2 concerns, market attention may quickly look past last Friday’s Q2’16 GDP report. The Atlanta Fed’s GDPNow forecast for Q3’16 growth is at +3.7% thus far. Markets and the Fed have very different views on how incoming data may affect the Fed’s rate path. While some regional policymakers have called for one, even two rate hikes this year, Fed funds futures contracts were only pricing in a 9% chance of a rate hike in September and only 32% by December, before the release of today’s NFP report.

Immediately after the report, expectations for a rate hike spiked as September rose to 18% and December to 43%. While correlation is not causation, the Fed has never hiked rates without the market pricing in at least a 60% chance in Fed. The ‘first hike month’ – the month in which expectations are at least 60% - was pulled forward from January 2018 to November 2017 as a result of today’s US labor data.

Here are the data lifting the US Dollar this morning:

- USD Unemployment Rate (JUL): 4.9% versus 4.8% expected, from 4.9%.

- USD Change in Non-farm Payrolls (JUL): +255K versus +180K expected, from +287K.

- USD Labor Force Participation Rate (JUL): 65.4% versus 65.5% previously.

- USD Average Hourly Earnings (JUL): 2.6% versus 2.6% expected, from 2.6% (y/y)

See the DailyFX economic calendar for Friday, August 5, 2016

Chart 1: EUR/USD 1-minute Chart (August 5, 2016 Intraday)

US Dollar Surges amid Second Consecutive NFP Above +250K

Following the data, the US Dollar rose sharply against the Canadian Dollar, with USD/CAD rising to as high as C$1.3151 from C$1.3014 (amplified by the weak Canadian labor figures). By the time this report was written, the pair had settled near C$1.3132. Elsewhere, US Dollar gains were consistent, with EUR/USD falling from $1.1155 pre-report to $1.1077 at the time of writing. With FX volatility edging higher again, it’s the right time to review risk management principles to protect your capital.

Read more: August Seasonality Sees Worst Month of Year for S&P 500, Rebound in USD

--- Written by Christopher Vecchio, Currency Strategist and Omar Habib, DailyFX Research

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