The massive upside surprise to US payrolls could prove to be a significant turning point in the US dollar’s fortunes. To summarise for those who have not already been bombarded with the press reports, payrolls dropped by 11k, much less than expected. Net revisions totalled +148k, the workweek rose and the unemployment rate fell to 10%, also better than forecast and likely a surprise to the US administration who hinted at a rise in the unemployment rate. In addition, the rise in aggregate hours worked point to a solid set of economic data for November.
Equity and bond market reaction was as would be expected; equities rallied and bonds sold off. However, and this is what was most interesting, the dollar strengthened. Why is this odd? Well, over the past 9 months any news that would have been perceived as positive for risk appetite was associated with dollar weakness. Instead the dollar strengthened, with USD/JPY pushing through 90.00 and EUR/USD sliding below 1.50. The move was supported by a firm reading for US factory orders.
The dollar reaction to the data was reminiscent of the historical reaction to strong data prior to the financial crisis, of buying dollars in anticipation of a more hawkish Fed and the increased potential for an earlier hike in US rates and/or scaling back of quantitative easing. It is probably too early to believe that the dollar’s movements are once again a function of interest rate differentials but it is a taste of things to come. In any case, markets will be able to garner further clues from a speech by Fed Chairman Bernanke at the beginning of the week.
The post payrolls dollar reaction could have also reflected the fact that EUR/USD failed to break above the 1.5444 high over the week resulting in a capitulation of stale long positions. If the S&P 500 stays above 1100 EUR/USD could retrace higher but I suspect that for the most part a broad 1.48-1.51 range is likely to dominate over the week.
Interestingly the hawkish spin to last week’s ECB meeting failed to lift EUR/USD suggesting EUR longs are becoming increasingly exhausted. ECB President Trichet speaks on Monday and may reiterate that the ECB’s measures to begin scaling back its liquidity provision should not be taken as a step towards monetary tightening.
USD/JPY proved interesting last week pushing higher in the wake of strong rhetoric by the Japanese authorities threatening intervention to prevent JPY strength. The BoJ’s attempt to provide more liquidity to banks also helped on the margin to weaker the JPY but I still believe the impact of the move will prove limited. Nonetheless, exporters and Japanese officials may be more relaxed this week, with USD/JPY above 90.00.
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