Non-Farm Payrolls and Storm Clouds after UK Election

• Non-Farm Payrolls - Not Good Enough for the Dollar
• GBP Soars, But Cameron's Win Still Means Storm Clouds Ahead
• EUR: Next Up, May 11 and May 12 Greek Deadlines
• CAD Employment, Strength Beneath the Headlines
• AUD: RBA Minutes Revive Rate Cut Expectations
• NZD: Unfazed by Weak Chinese Trade

Non-Farm Payrolls - Not Good Enough for the Dollar

This month's U.S. non-farm payrolls report failed to trigger a big move in currencies.  The dollar traded lower against most of its peers but recent ranges remain intact after the slide. A total of 223k jobs were created in the month of April, which was very close to expectations and the unemployment rate dropped to 5.4%, its lowest level in nearly 7 years.  Labor force participation also increased to 62.8% from 62.7%.  These figures reflect continued improvement in the labor market but average hourly earnings slowed to 0.1% while payrolls in March was revised down to 85k from 126k.  The previous numbers were much weaker than initially reported and this came as a shock to investors because it shows just how much the economy slowed in Q1. Wage growth has also been an ongoing concern for the central bank and they may delay tightening until earnings start to rise.
Even though FX traders were disappointed, the Federal Reserve has no reason to change their plans to raise rates in 2015 after today's report. It wasn't a great release but it wasn't terrible either and we believe the data reinforces our view that liftoff will be September.
Until the central bank's guidance hardens in way or another, we expect more consolidative price action in the dollar.  Retail sales is the most important piece of U.S. data next week and even though wage growth slowed, there was enough improvement in the labor market to keep investors spending. 

GBP Soars, But Cameron's Win Still Means Storm Clouds Ahead

The unexpected victory by Prime Minister David Cameron sent sterling soaring against all major currencies. Investors cheered the news by buying everything from pounds to Gilts and U.K. equities.  Yet just because the existing party remains in power does not mean its a green light to buy U.K. assets even if this is their first all out majority in 23 years.

The Tories' victory was driven by Cameron's promise of a referendum on European Union membership and the Scottish National Party's strong results means they could make another bid for independence.  Convincing U.K. voters and the Scots to maintain status quo will be an uphill battle that could renew uncertainty for the currency.  A Brexit is a very big deal for the financial markets and a growing possibility would undoubtedly trigger sharp volatility in U.K. assets. However for now, continuity is good news and both the Scots and Tories will take some time to celebrate their respective victories. This provides a window of opportunity for sterling bulls looking to drive GBP/USD above 1.55 and EUR/GBP to 0.70.  A EU referendum won't happen until 2017 and the Scots should take another year to drum up new support for a pro-independence campaign. 

Had the Conservative Party fail to secure a majority or lost, we would have seen a quick and aggressive decline in sterling but after an initial relief rally, investors immediately shift focus to all of the question marks that come with a Conservative victory. Recent U.K. economic reports have been disappointing with the trade balance widening in the month of March and manufacturing activity slowing. First quarter GDP growth was very weak and according to the last report, consumer spending dropped 0.5% in the month of March. These indicators will make it very difficult for the Bank of England to raise interest rates this year.  We'll learn more about the central bank's views when the Quarterly Inflation Report is released next week. The Bank of England also has a monetary policy announcement but no changes in policy are expected but industrial production and jobless claims could have a meaningful impact on the currency. Unfortunately we don't expect these event risks to paint a positive picture for the economy. With the U.K. election behind us, the focus returns to monetary policy.

EUR: Next Up, May 11 and May 12 Greek Deadlines

The focus will also be on euro next week with Eurozone finance ministers meeting on Monday to discuss Greece. While some traders are hopeful because the Greeks continue to talk up the possibility of a deal, the chances of a euro positive outcome is slim. In fact, we believe there's a less than 5% chance that Greece and its lenders will announce a deal on Monday. Both German and French officials have acknowledged that an agreement on reforms is unlikely especially since there's word that Greece refuses to present new reform measures until a deal is reached. EUR/USD rebounded dramatically this week but the back and forth will limit the currency pair's gains. Yet we don't expect EUR/USD to sell off sharply if the meeting passes without an agreement because investors have grown accustomed to the lack of progress.  The disappointment should lead to only a mild decline in the currency. Part of the reason why investors aren't overly concerned is because Greece managed to scramble enough cash to meet their EUR 200 million interest payment to the IMF this week. They still owe another EUR 750 million on May 12th, a day after the meeting but if this payment is missed, an extension will probably be given.  While the liquidity situation in Greece is tight, the government said they have enough funds to meet their interest payments until June.  So the liquidity deadline is the end of the month and the political deadline is the end of next month when the rescue plans ends. In terms of economic data, the main focus for euro traders will be first quarter GDP numbers.

CAD Employment, Strength Beneath the Headlines

Mixed Canadian employment numbers prevented the Canadian dollar from participating in today's anti-(US) dollar rally.  More than 19k jobs were lost in the month of April, which was significantly weaker than the market's -5k forecast but all of the jobs shed were part time.  Full time work actually rose by 46.9k, which was the largest increase in 8 months. The unemployment rate also held steady at 6.8% against a forecast for a rise to 6.9%.  In other words there was enough strength in today's report to keep the Bank of Canada optimistic.  Meanwhile weaker Chinese trade data failed to have much impact on AUD and NZD.  The country's trade surplus rose less than expected to $34.12B as exports dropped 6.4% and imports fell 16.2%. This deterioration in internal and external demand raises concerns for countries like Australia and China who rely heavily on Chinese imports.  AUD also shrugged off dovish RBA minutes. The central bank lowered its GDP forecast, said the Australian dollar should be trading lower and left the door open for additional easing. Only second tier economic reports are scheduled for release from the commodity producing countries next week.