Dollar Stronger After Non Farm Payrolls
Once again, the US Dollar saw declines early last week but managed to rally into the Friday session as supportive macro data helped bolster arguments that the Federal Reserve will begin signalling an end to its historic third round of quantitative easing stimulus. Non Farm Payrollsfor the month of May came in above market expectations, at 175,000 for the period. To be sure, this is only slightly higher than the original market expectation of 165,000. But the reaction from traders was well pronounced as employment data early in the week led to downwardly revised projections and a good deal of positioning for a negative number in the NFPs.
Specifically, these downward revisions came as a result of the very disappointing ADP employment survey, which showed that only 135,000 jobs were created for the month in the private sector. Initial estimates in the NFP data was well above that and since these two reports have a high degree of position correlation, many traders entered into Dollar bearish positions on the expectation that the NFP outcome would follow this negative trajectory. When the headline number in the NFPs came in at a positive surprise, these traders were forced to reverse their positions and enter into new Dollar longs. This reaction can be described as “knee jerk” however, as there were some internal negatives that should have received more attention.
Jobs numbers for the previous month were revised lower (from 168,000 to 149,000) and the Unemployment Rate ticked up to 7.6%. Most traders were watching these numbers as a means for determining the next perceived stance from the Federal Reserve, which has made clear that its target Unemployment Rate is still much lower (at 6.5%). So while these jobs numbers were stronger than expected into the end of the week, some of the internal factors suggest that we could see a bearish reversal once markets have more time to go over the full report.
The Week Ahead in Forex
Looking ahead, market volatility could start to slow as overall liquidity is likely to decline in June. We will have some key event risks, however, that are likely to jar specific currency pairs. We will have the next monetary policy meeting from the Bank of Japan (BoJ). Traders will be watching for clues to determine the extent to which the central bank aims to weaken its currency in order to support export companies. We will also have jobs numbers out of Australia. A positive result here could bring to a halt the currency’s massive decline seen in the last few months. A negative number will likely send pairs like the AUD/USD and AUD/JPY to new lows for the year. Overall, look for a slower start to trading (at least into the middle of the week), as traders look to reassess the market situation after last week’s fireworks.