Dollar Soars, NFP=All Clear For Liftoff

Dollar Soars, NFPs = All Clear for Liftoff

The U.S. dollar soared to fresh highs against many of the major currencies on the back of a solid labor market report. Non-farm payrolls rose 280k, the strongest single month of job growth this year. Not only was this report much firmer than anticipated, but average hourly earnings also rose 0.3% and the participation rate hit 62.9%, the strongest pace of growth for both measures in 4 months. Investors wrote off the rise in the unemployment rate to 5.5% as a consequence of greater labor-market participation. Based on the broad-based gains in the dollar and the sharp rise in U.S. yields, traders view the May labor market report as a green light for liftoff by the U.S. central bank. Immediately after the NFP report, the buzz in the market was for a rate hike in August, July or even June. Federal Reserve officials have suggested that a rate hike is possible at every meeting but because this would be their first rate hike since June 2006, the move takes on historical significance. To ensure that the bond markets do not go crazy after the move, Janet Yellen will want to take the opportunity to downplay the decision by saying this is not the beginning of an aggressive tightening cycle. An impromptu press conference could be held after any meeting, but wage growth is still weaker than what is needed for the Fed to meet their target. Therefore we continue to believe that the Fed will wait until September to raise rates but Friday’s report ensures that policymakers will be more hawkish when they meet in June. There’s no doubt that Yellen will use her press conference this month to prepare the market for a third-quarter rate hike. This means that the U.S. dollar has more room to rise, especially after the June meeting. We like buying dollars against the euro because of Greece. USD/JPY is overbought and there may be an opportunity to buy USD/JPY at a lower level. The beginning of next week is relatively quiet so there could be some profit taking in USD/JPY with the main catalyst for the dollar being Thursday’s retail sales report. Strong job growth and higher gas prices should boost spending but the data may not live up to the market’s lofty expectations.

EUR: Greek Debt Restructuring is Needed

While the euro traded sharply lower against the U.S. dollar Friday on the back of the stronger non-farm payrolls report, ongoing concern about Greece continues to weigh on the currency. While we expect an eleventh-hour deal at the end of the month, the current proposals are unacceptable to the opposite side and now counter offers need to prepared. It will be very difficult for the Greek debt crisis to be resolved without debt restructuring, a point being pushed by Tsipras’ government. So far creditors have been reluctant to forgive part of the country’s debt, but with Greece missing its latest payment and asking to bundle the 1.5 billion euros into a lump sum on June 30, it may be forced to acquiesce after this carefully calculated chess move. Since there is not much in the way of market-moving European data on the calendar next week, the focus will remain on Greece. More meetings will be held, which means continued headline risk for the euro. The G7 meets this weekend and while Greece is not officially on the agenda, there’s no doubt that it will be a hot topic at the meeting. Considering that we don’t expect much progress on the debt negotiations in the coming week, we believe that the euro will trade lower and break below 1.10.

CAD/JPY Soars on Solid Canadian Job Growth

Like the U.S., the month of May was a very good month for job growth in Canada. Close to 60k jobs were created last month, more than five times more than economists had anticipated. What was particularly encouraging was the fact that there was a very strong increase in both full- and part-time work. Full-time jobs rose 30,900 while part-time jobs increased 27,900. The unemployment rate held steady but the participation rate edged slightly higher. The Canadian dollar jumped in response but losses in USD/CAD were limited by U.S. dollar strength. Instead, the best-performing CAD pairs were CAD/JPY and EUR/CAD. As we pointed out in Thursday’s note, strong U.S. and Canadian employment reports would propel CAD/JPY above 100. The currency pair raced to a high of 100.82 intraday. The loonie would probably have appreciated more if not for OPEC’s decision to keep production unchanged. Even though oil prices remain low and there is an excess supply, they refuse to cut production. Meanwhile, the Australian and New Zealand dollars continued to move lower with NZD dropping to its lowest level versus the dollar in 4.5 years. No data was released from New Zealand but Australia’s construction sector PMI index edged slightly higher. Next week is a big week for the commodity currencies with a number of important Chinese economic reports including the trade balance and industrial production scheduled for release. The Reserve Bank of New Zealand also has a monetary policy announcement on the calendar and Australia has its monthly labor-market report on tap.

GBP/USD Slips on Dollar Strength

Like all of the other major currencies, the British pound fell victim to U.S. dollar strength. No U.K. economic reports were released Friday and with only the trade balance and industrial production reports scheduled for release next week, sterling will most likely trade on the market’s appetite for U.S. dollars and euros. As such we expect further correction in EUR/GBP and range trading for GBP/USD — 1.55 and 1.5075 are the key levels to watch for the currency pair. The only U.K. event risks will be a speech by Carney and McCafferty. If either men touch on monetary policy, they will most likely lean toward keeping rates unchanged for the time being but at the same time, they could confirm that the next move by the Bank of England will be to raise — not lower — interest rates.


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