Soft NFP to take some of the wind out of the USD's sails – TDS

Payroll employment printed another subdued increase of 559K in May, disappointing consensus but up from 278K in April. This month's relative disappointment is likely to put an end to the USD's latest burst of strength, in the view of economists at TD Securities.

The headline NFP reading came in meaningfully below consensus

“Payrolls rose 559K, a strong number by pre-COVID standards, but below consensus. They remain down 7.6mn from the pre-COVID level. Unemployment fell to 5.8% from 6.1%. Average hourly earnings rose a solid 0.5% MoM; the YoY pace rose to a still-low 2.0% from 0.4%, although that calculation is likely being held down now by compositional effects.”

“The data will likely reinforce the view of most Fed officials that progress has not been ‘substantial’ enough for them to start signaling tapering. That does not preclude them from starting to talk about discussing a progress-dependent plan for tapering as soon as at this month's FOMC meeting, however. Indeed, they have been signaling that such a conversation is about to start.”

“The USD is likely to unwind a good portion — if not all — of its recent gains against the G10 complex. The official report has its bright spots, but we think the FX market will struggle to overlook the headline shortfall.”

“We note that EUR/USD has pushed back above the 1.2133 threshold. A weekly close above that mark should help cement expectations of a return to familiar territory until fresh catalysts emerge. On that front, we think investor attention will soon pivot to next week's ECB meeting as the next major item on the market's agenda.” 

“We think this particular mix of ‘very good but not great’ should be constructive for risk appetite in general. Higher beta and risk-sensitive currencies may begin to outperform. Here, we think the AUD and NZD stand out as candidates for renewed gains. The CAD, in contrast, may lag somewhat after Canada registered its own weak employment report for May.”