Dollar Soars, Jobs Data Smashes Expectations

• Dollar Soars, Jobs Data Smashes Expectations
• EUR/USD: Reality Sets In
• CAD: Hit by Weaker Canadian Data
• AUD: Construction Sector Activity Slows
• NZD: All Eyes on RBNZ and Chinese Data
• GBP/USD - Closing in on 1.50

 Dollar Soars, Jobs Data Smashes Expectations

 The U.S. dollar soared to fresh highs against most of the major currencies following today's strong labor market report. With nearly 300k new jobs created in the month of February, the unemployment rate dropped to 5.5%, the lowest level since May 2008.  Average hourly earnings grew only 0.1% compared to the market's 0.2% forecast, but a rise in wages is enough to put a June rate hike back on the table. The jump in 10-year yields and slide in equities confirms that the focus for investors across the financial markets is now on tightening in June instead of September.  A hike in the summer is not a done deal because the central bank could still find reasons to be patient particularly since low inflation remains a problem in the U.S. and the rest of the world is dealing with deflation.  The non-farm payrolls report was strong but manufacturing and housing market data has been weak and the Fed will want to see broad based strength before raising interest rates. Yet June is 3 months away so there's no rush for the Fed to make a decision right now. The central bank's goal in March is to provide themselves with as much flexibility as possible without committing to a move.  One way to do so would be to change forward guidance on March 18th but have Fed Chair Janet Yellen strongly emphasize that the timing of tightening will be data dependent during her press conference. This would give the Fed the option to raise rates in June while maintaining flexibility for a September hike if the economy fails to gain momentum over the next few months. Today's hot jobs numbers breathed new life into the dollar and with no major U.S. economic reports scheduled for release until retail sales on Thursday, there's very little on the calendar to contradict the report. We now expect further gains in the dollar with a move to least 1.0765 for the EUR/USD and 121.85 for USD/JPY. 

EUR/USD: Reality Sets In

 In the short span of 2.5 months, the euro lost 10% of its value against the U.S. dollar.  This week alone the currency pair dropped nearly 3% extending a move that has prevented EUR/USD from rallying in the last 7 trading days.  The currency pair has been one of the worst performers this year and while we have hoped for a bottom, the relentless selling has driven euro to fresh 11.5 year lows. While there are many other central banks with a bias to ease, most have recently made moves and are now waiting to reap the fruits their labor.  The European Central Bank on the other hand is not scheduled to start buying bonds until Monday and this program will last for a minimum of 18 months.  Despite the improvements in Eurozone data including this morning's German industrial production report, the EUR/USD has been hit hard by reality that the Fed preparing to raise rates at a time when the ECB is just beginning to ease.  The EUR/USD could remain under pressure as rate hike expectations build into the March 18th FOMC meeting.  In the long run, a stronger Europe will be attained by a weaker euro but in the meantime, a move down to the September 2003 low of 1.0765 is likely with a possible drift towards 1.05 if that level is broken.  With only Eurozone industrial production and the German trade balance scheduled for release next week, the downtrend should remain intact. 

CAD: Hit by Weaker Canadian Data

 Demand for U.S. dollars drove all three of the commodity currencies sharply lower against the greenback but weaker Canadian data also contributed to the rally in USD/CAD.  Building permits in Canada dropped a whopping -12.9%, three times more than expected. The trade deficit jumped to -2.45B in January from -1.22B and labor productivity dropped -0.1%.  While the Bank of Canada shifted to a neutral policy bias this week, today's reports had investors thinking that they could lower rates again in 2015.  Weaker construction sector activity also weighed on the Australian dollar but compared to the CAD and NZD, AUD has been surprisingly resilient.  Whether this strength is maintained will be determined by this weekend's Chinese trade data, Wednesday's Chinese industrial production report and Thursday's Australian employment report. Meanwhile the New Zealand dollar continues to be the worst performer, falling more 1%. Over the last 48 hours, we have seen NZD/USD drop from a high of 76 cents down to a low of 0.7360.  This move was driven by the market's voracious demand for the buck and its growing concern about next week's Reserve Bank of New Zealand meeting, which happens to be one of the most important event risks on next week's calendar. The RBNZ announced this week that they are looking to change lending rules.  In doing so, they are signaling a shift in tactics away from rate hikes which can be problematic if there are risks to growth.  We do not expect the Reserve Bank of New Zealand to cut interest rates next week because the rebound in dairy prices will help to stabilize the economy. However, the central bank will make it clear that the tightening cycle is over. 

GBP/USD - Closing in on 1.50

 The British pound climbed to fresh highs versus the euro on Friday but extended its losses against the U.S. dollar. This divergence reflects two things - #1 sterling is not being driven by U.K. fundamentals and #2 the market is not convinced that the BoE will raise interest rates in 2015. Investors recognize the divergence between EZ and UK monetary policy and the stronger U.K. economic outlook but the underperformance of GBP/USD indicates that the Fed is expected to raise rates before the Bank of England. While we agree with this wholeheartedly, the BoE should not be far behind. Unfortunately next week's U.K. industrial production and trade balance reports won't have a significant impact on U.K. rate hike expectations so in all likelihood, sterling's performance will continue to be driven by the market's appetite for euros and U.S. dollars. Support in GBP/USD is at 1.4950 and support for EUR/GBP is at 70 cents.