Week in FX Americas – U.S. Dollar Gets Green Light after Jobs Report

The U.S. dollar ends the week once again the dominant currency. An anemic European Central Bank (ECB) meet and press conference temporarily provided a EUR short squeeze just shy of the weekly highs (€1.2714) on Thursday, only to come undone by a Friday’s stellar U.S. jobs report, falling in excess of +1.2% to a new two-year low (€1.2502 — for now).

Nonfarm payrolls rose +248k in September, beating consensus of +215k. The stronger headline came with robust revisions for both August (+38k to +180k) and July (+31k to +243k). The good news did not stop there; the unemployment rate plummeted to +5.9%, another new six-year low.

U.S. Unemployment Rate Breaks Psychological Barrier

Nevertheless, there was disappointment and it came again in average hourly earnings, which was flat. The market had had been expecting an uptick of around +0.2%. Overall, the report was good, apart from wages. The three-month average is now at +228k, six months at +245k, and the unemployment rate finally broke the psychological +6% handle.

Friday’s number will provide fodder for both the Federal Reserve’s hawks and doves. The hawks will again focus on the robust unemployment rate and strong jobs growth, while the doves will poke holes in the weak wage growth argument and the labor participation rate. This will allow them to highlight again the U.S. labor market’s slack problems which should have no cause for any immediate inflation issues.

Fed Chair Janet Yellen should be able to use last month’s jobs report to keep the hawks in line at the October 29 meet. The market should expect her to focus on the average hourly earnings which supports her argument for “significant underutilization of labor resources.”

The dollar continues where it left off in the third quarter, strengthening against its rivals in the developed and emerging markets, most notably versus the JPY and EUR, and BRL and RUB. The potential divergence in monetary policy between the U.S., Japan, and the eurozone should continue to provide dollar support for some time yet.

Next Week for the Americas

The market is not done yet with the central banks. Next week the Reserve Bank of Australia kicks things off on Monday. Despite an AUD rally of late (AUD$0.8670), the market will be expecting some dovish currency comments from Governor Glenn Stevens. It has become a regular part of his rhetoric repertoire. On Tuesday, the Bank of Japan takes center stage; in all respects Prime Minister Shinzo Abe is happy with the yen’s relative weakness of late. Wednesday will be dominated by the Federal Open Market Committee minutes. As per usual, the market will be looking for any clues to justify building on current positions. The Bank of England meeting dominates Thursday: Is Governor Mark Carney still the favorite to be the first developed nation to hike interest rates? Finally on Friday, Canada will report its own jobs report. Can the Canucks keep up with their largest trading partner?

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