14 Dollar Drivers In The Week Ahead

thenews 2016.05.09 07:12

The key issue facing the foreign exchange market is whether the modicum of strength the US dollar demonstrated last week is the beginning of a sustainable move. It is possible that the market is again at a juncture in which the price action will drive the narrative rather than the other way around. A move above JPY108 and a decline in the euro below $1.1350 signal a start to a broader dollar recovery that may have begun last week with impressive gains against the dollar-bloc.

The RBA’s rate cut took many by surprise, and the forward guidance, which included a reduction in the central bank’s inflation forecast, encouraged speculation of another rate cut in the coming months. The Australian dollar has given back half of the gains registered since mid-January. A recognition that the Canadian economy continues to wrestle with its terms of trade shock and a record trade deficit spurred some profit-taking in the Canadian dollar. The US dollar rose through a downtrend line that began in late-January, and short-term Canadian interest rates, which have risen since the end of January, have started softening.

The resilience of the US dollar and the firmness of US yields after the monthly report showed the weakest job growth in seven months may be significant. Just like strong jobs growth in Q4 15-Q1 16 period (averaged monthly jobs growth 243k) did not translate to strong growth, the weaker jobs growth may, in fact, coincide with an acceleration of US GDP.

Of course, the jobs data was not horrific, and employment growth is expected to slow as full employment is approached. Nor were the details particularly troubling. Manufacturing added jobs when economists had been expected it to have shed workers. The workweek increased 0.1%, which given the number of American employees, translates into about 450k full-time equivalents (in terms of hours worked). Not only were there more people working a longer work week, but they were also getting paid slightly better. Average hourly earnings rose 0.3% for a 2.5% year-over-year pace.

Perhaps the most troubling part of the report was not the miss on the headline but the decline in the participation rate. It fell from 63%, a two-year high, to 62.8%. The participation rate had been trending higher, and we caution against reading too much into a single data point.

On balance, one must suspect the Federal Reserve will conclude that the labor market recovery remains intact, and in any event, it will get another reading before next month’s meeting. The issue, which the FOMC’s April statement identified, is consumption. We anticipate better numbers ahead, beginning with this week’s April retail sales report.

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