Will US Payrolls Breathe New Life into the Dollar?

• Will US Payrolls Breathe New Life into the Dollar?
• GBP: Counting Down to the Exit Polls
• Rollercoaster Ride in EUR/USD
• USD/CAD Jumps as Oil Dips, CAD Employment Next
• AUD Hit by Weaker Labor Data
• NZD Gives Up Gains, Resumes Slide

 Will US Payrolls Breathe New Life into the Dollar?

Even though the U.S. dollar traded higher today, being long the currency in the second quarter has been an extremely difficult trade. The value of the greenback declined against all of the major currencies with its losses exceeding 4% versus the euro, Swiss Franc, Canadian and Australian dollars.  Back to back weakness in U.S. data raised concerns about U.S. growth and the impact that it would have on the pace of tightening by the Federal Reserve.   Throughout this time, the central bank called the deterioration in data transitory and made no indication of backing away from raising rates this year.  However investors need more convincing and they are all looking to Friday's non-farm payrolls report for a reason to jump back into long dollar trades.  After last month's major disappointment in job growth, economists are looking for a strong rebound in April. 
Unfortunately like the U.K. Election, tomorrow's non-farm payrolls report will be a close call.  While we are optimistic and believe that the labor market recovered last month, the leading indicators that we typically track ahead of payrolls provides some cause for concern. Also, while the absolute number of job growth is important, investors will be watching average hourly earnings and the unemployment rate closely as well as the unemployment rate is expected to fall but wage growth may slow. 

Taking a look at the 8 leading indicators for non-farm payrolls that we typically track ahead of the report, only half of them call for a pickup in job growth. The strongest arguments for a rebound are jobless and continuing claims, which fell to their lowest level in 15 years. The employment component of service sector ISM increased but the uptick was small and even though the University of Michigan reported an improvement in consumer sentiment, the Conference Boards' consumer confidence index fell sharply.  Also, this morning, Challenger Layoff & Christmas reported the largest increase in layoffs since August 2013 and yesterday ADP reported a smaller increase in corporate payrolls. In other words, it's a close call on whether the April non-farm payrolls report will breathe new life into the dollar. 

In order for USD/JPY to trade back up to 120 and EUR/USD to break 1.12, we need job growth to exceed 200k, the unemployment rate to drop to 5.4% and average hourly earnings to rise by 0.3% or more. If any part of this equation is off, investors will be reluctant to buy dollars.  

 
How the April Leading Indicators for NFP Stack Up Arguments for Stronger Payrolls 

1. March was a WEAK Number Making a Recovery is Likely
2. Rise in Employment Component of ISM Non-Manufacturing Index
3. Jobless Claims 4 Week Average Drops to Lowest Level in 15 years
4. Continuing Claims Falls to Lowest Level in 15 years
5. Rise in University of Michigan Consumer Sentiment Index

 Arguments for Weaker Payrolls
 

1. ADP Employment Index Drops to 169k from 175k
2. Big Drop in Consumer Confidence
3. Drop in Employment Component of ISM Manufacturing Index
4. Challenger Job Cuts rise 52.8%, Biggest Increase Since August 2013

 
GBP: Counting Down to the Exit Polls

Traders are waiting with bated breath for the U.K. Election's exit polls. There was very little consistency in the currency ahead of the results with sterling trading slightly lower against the U.S. dollar and slightly higher against the euro. The Conservatives appear to be leading by 1% margin but it is too close to call. The first exit poll results should be released around 22 GMT with more clarity around 4 GMT. We expect the U.K. to end up with a hung Parliament but have placed our trades to sell sterling below market on the premise that if there is no clear winner, sterling will spiral lower. GBP/USD dropped more than 650 pips in the 48 hours following the 2010 election so there could still be plenty of opportunity after the pair drops 100 to 200 pips. The main downside to this technique is less desirable risk reward and slippage. With this in mind, if you prefer to wait out the volatility, then know that election uncertainty always pass as the victor is likely to assert himself as Prime Minister quickly and take steps to form a coalition government. Under this scenario, buying GBPUSD 3% to 4% lower than current levels may be a smart technique particularly since the U.S. is poised to raise rates this year and the latest PMI services data was strong.  Even in 2010 the currency pair bounced quickly and aggressively in the days following the election and the same could happen this time around.
 
Rollercoaster Ride in EUR/USD

 EUR/USD traders went on the a rollercoaster ride today with the currency pair racing to a high of 1.1392 during the European trading session only to reverse and give up its gains and hit a low of 1.1237 during North American hours.  German factory orders grew at a slower pace but the reversal did not begin until 4 hours after the release.  The market is worried about the Greek debt deal talks and rightfully so because a deal on Monday is unlikely. However the main reason for the reversal in EUR/USD is the wild intraday volatility in bond yields. German 10 year bund yields hit a high of 0.775% intraday before dropping 15bp to end the day flat. The moves in Italian and Spanish yields were even more significant with rates seeing major losses after big gains at the start of the European session.  The recent surge in European yields has been suspicious.  Many attributed the move to stronger data and lack of liquidity but the stronger the rally in rates, the greater the headache that it creates for the ECB. While German trade and industrial production numbers are scheduled for release on Friday, euro flows will be dominated by the U.K. election result and U.S. non-farm payrolls.

 USD/CAD Jumps as Oil Dips, CAD Employment Next

 The Canadian, Australian and New Zealand dollars traded sharply lower against the U.S. dollar on Thursday ahead of important economic reports.  Aside from non-farm payrolls, Chinese trade numbers and Canada's employment report are also scheduled for release. USD/CAD surged today on the back of falling oil prices but we think the gains will be limited because oil prices increased 14% in the past month which should provide positive momentum for Canada's economy going forward.  With the employment component of IVEY PMI rising sharply, we also look forward to an improvement in job growth that should restore the downtrend in USD/CAD. Meanwhile last night's Australian employment report put pressure on the Australian dollar with 2.9k jobs lost in the month of April.  What was particularly painful about the report was the fact that all of the jobs lost were full time and this caused the unemployment rate to rise to 6.2%.  The RBA will release its statement of monetary policy this evening and we are weary that the report will be less optimistic than the monetary policy statement.  Finally Chinese trade numbers will have a significant impact on all 3 of the commodity currencies. Economists are looking for a big jump and a small increase in exports.  If the data falls short in any way, it could extend the losses in AUD and NZD.