Was Non-Farm Payrolls Good or Bad for the Dollar?

• Was Non-Farm Payrolls Good or Bad for the Dollar?
• USD/CAD: IVEY PMI Declines, Employment Mixed
• AUD Soars on RBA Monetary Policy Statement
• NZD Shrugs Off Lower Fonterra Payout
• GBP Extends Losses Despite Narrow Trade Deficit
• Euro Lifted by Dollar Profit Taking

 Was Non-Farm Payrolls Good or Bad for the Dollar?

Many investors were confused by the dollar's reaction to non-farm payrolls. A total of 215K jobs were created in the month of July and while this was slightly short of the consensus forecast, the upward revision to the previous month's report more than made up for the difference.  If the Federal Reserve was looking for "some improvement" in the labor market, today's release certainly meets those expectations and yet the dollar lost value against most of the major currencies. While the decline in the greenback can be attributed to the annual earnings growth miss or the record amount of Americans not in the labor force, these factors should not have overshadowed the solid increase in job growth, stability of the unemployment rate, improvement in the U-6 rate and increase in average hourly earnings on a monthly basis. Not only does today's report leave September lift-off on the table but we believe it hardens the case for tightening at the next monetary policy meeting.  We also think that today's pullback in the dollar has more to do with positioning. The greenback is overbought and next week's U.S. calendar is light with only retail sales and the University of Michigan consumer sentiment report scheduled for release.  Some profit taking in the dollar is therefore not unusual especially for USD/JPY where 125 continues to be rock solid resistance. Yet the initial dollar rally indicates the market understands the positive implications of today's report.  We view the latest pullback in the dollar as an opportunity to buy the greenback at lower levels.

USD/CAD: Data Calls for Further Gains

All three of the commodity currencies ended the day higher against the greenback on the back of the correction in the dollar. However economic data from Canada calls for further gains in the currency pair.  The number of jobs created in Canada was slightly greater than forecast (6.6K vs. 5K) but all of the employment was part time with full time jobs falling by 17K.  The unemployment rate remained unchanged at 6.8% but the participation rate decreased to 65.7 from 65.8.  The IVEY PMI index also dropped to 52.9 from 55.9, indicating a further slowdown in manufacturing activity. Combined with the continued weakness in oil prices, the Canadian dollar should be trading lower with USD/CAD on its way to 1.35.  We view today's decline as a correction within an overall uptrend. With no major Canadian economic reports scheduled for release this week the loonie should take its cue from oil.  Meanwhile the Australian dollar performed extremely well after the release of the RBA monetary policy statement.  The central bank lowered their growth forecast but upgraded their inflation and unemployment forecasts.  They believe that further weakness in the currency will lift GDP growth. This upbeat statement reduces the chance of further easing by the central bank this year.  However next week, the rally in the Australian dollar will be tested by China' retail sales and industrial production reports.  The New Zealand dollar also performed well despite a lower payout announced by Fonterra, the country's largest dairy producer. Lower payout means less money in hands of dairy farmers and therefore fewer funds to recycle into the economy.

GBP Extends Losses Despite Narrow Trade Deficit

Sterling extended its losses against the U.S. dollar despite stronger trade data. Not only did the country's trade deficit widened less than anticipated but it narrowed to its smallest level in 4 years on the back of rising exports. The U.K. trade gap is narrowing which will be positive for GDP growth but the recent strength of sterling versus the euro could limit future improvements in trade activity.  Investors are still fixated on yesterday's Bank of England meeting and how it failed to live up to expectations.  The BoE is still on track to raise rates in 2016 but the broad based decline in sterling indicates that investors were sorely disappointed.  U.K. employment numbers are scheduled for release next week and no major changes are expected. The manufacturing sector reported strong job growth but the service sector saw slower growth. The most important thing to remember is that while the BoE is in no rush to tighten, they will still be the next major central bank to raise rates and therefore sterling should be bought on dips and not sold on rallies.

Euro Lifted by Dollar Profit Taking

Euro traded higher against the U.S. dollar on the back of profit taking in the greenback. Data from the Eurozone was mixed with industrial production falling 1.4% and the trade balance improving. As we mentioned in yesterday's note, today's performance of the EUR/USD would be driven entirely by the market's response to non-farm payrolls.  Meanwhile talks with Greece appear to be going well. At minimum there has not been any negative headlines and instead both sides believe that progress is being made. According to Prime Minister Tsipras, Greece is in the final stages of bailout talks and the EU Commission believes that a deal could made before August 20th, when Greece has to buy back 3.5 billion euros of its bonds from the ECB. The consolidative price action in the EUR/USD suggests that investors are hopeful. A lot of progress needs to be made this week to meet the deadline and if negotiators are successful, we expect to see a further short squeeze in EUR/USD.  In the meantime, the German ZEW survey is scheduled for release next week along with Q2 German and Eurozone GDP.  Easing concerns for Greece and stronger data should bolster investor confidence and growth.