With a million new jobs looming, why can’t the dollar rally?

The U.S. dollar kicked off the first trading day of May with broad-based losses. On Friday, U.S. non-farm payrolls are due for release and with the labor department expected to report a million new jobs, some investors are wondering why the U.S. dollar is unable to rally.  With one of the world’s best vaccination rates, stimulus checks and rollback on restrictions, the U.S. is not only recovering rapidly but emerging as the world’s leading engine of growth.

The biggest problem for the dollar is that on its most fundamental level, the greenback is a safe haven currency. The U.S. led the recovery since the beginning of the year, so investors had plenty of time to buy dollars and take profits. Now, vaccination rates are rising in Europe and they are looking to ease restrictions.  The first quarter was the U.S. recovery trade but the second to third quarters should be focused on the global recovery.  Strong global growth is generally more positive for high beta currencies than safe haven currencies like the U.S. dollar. When Eurozone nations finally rollback restrictions and show stronger data, there will be renewed interest and demand for the euro. The recent weakness in the dollar is a reflection of investors getting ahead of this trading opportunity.

Add to that the Federal Reserve’s insistence that substantial progress has not been reached and an unexpected decline in the manufacturing ISM index and we can see why the dollar refused to rally despite the prospect of a very strong jobs report on Friday. Economists were looking for the ISM manufacturing index to rise to 65 from 64.7 but it dropped to 60.7 in April. According to the details of the report, it is high prices and supply shortages that set back activity instead of demand but yields declined. The ISM services and non-farm payrolls report are still expected to show a red hot recovery. The dollar should respond positively to these reports, but as the global recovery becomes the bigger story, demand for U.S. dollars will wane.

Aside from the U.S. jobs report, the Reserve Bank of Australia and Bank of England monetary policy announcements are also in focus this week. The RBA meets tonight and they are widely expected to keep monetary policy unchanged. The RBA should share the RBNZ’s concerns about house prices but with overall inflationary pressures subdued, they are in no rush to act. Even with the extraordinary amount of stimulus the RBA is providing, core price growth hit its lowest level ever in the first quarter. A lot of this is driven by slow wage growth which is a challenge to recover so it may be some time before price pressures see meaningful acceleration.

Sterling was the best performing currency on Monday as investors prepare for optimism from the Bank of England.  While no changes are also expected from the BoE, the strong recovery will prompt the central bank to revisit their outlook. Their economic assessment will be more upbeat as the government prepares to end their 1 meter social distancing rule on June 21st. This would pave the way for the reopening of live concerts, sporting matches and theaters just in time for summer. 

The Australian and New Zealand dollars also traded higher but the Canadian dollar lagged behind. Unlike the U.S. economists are looking for job losses in Canada in the month of April. A large part of the country is still in lockdown but the primary reason for the potential data disappointment is the unexpectedly strong job reports over the past few months.