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Non Farm Payrolls Dent Dollar

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January 12, 2014 By: , No Comments

US-Dollar-300x170

Forex markets got their first major price jolts of the the year as traders were forced to react to important employment data in the USand assess its importance for the next round of changes in policy at the Federal Reserve.  Employment figures marked the main theme of the week, as the ADP report gave traders an indication of what is happening in hiring at public companies and Friday’s Non Farm Payrolls offered the broader picture as the prime indicator of the week and month.

All of the early indicators suggested that these numbers would be strong, and this created the elevated consensus expectation that the NFP number would come in near 200,000.  These arguments were based on the better than expected numbers that have been seen during the last five months, and the stable ADP report on Wednesday (which is generally used as a precursor to assess the government data).  But the result was a bearish surprise, coming in at 74,000 for the month.  This weighed heavily on the US Dollar, and brought new buyers back into the Euro, Australian Dollar, and British Pound.

The Week Ahead in Forex Markets

In the week ahead, forex traders will be asking critical questions about whether or not these declines in data should be thought of as a true change in recent growth trends.  If this is the case, we could see more prolonged weakness in the US Dollar because this will suggest that the Federal Reserve might pause its reductions in quantitative easing stimulus.  In order for the Dollar to see sustainable rallies, we will need to see continued strength in the labor markets and an expression of confidence in the economy at the Federal Reserve.

Like it or not, this is where the majority of the focus rests even though any sell-offs in the Dollar will require forex traders to find an alternative store of value.  For those that are not willing to start buying gold, the only real options can be found in the Euro, British Pound and the commodity currencies.  Those that are bullish on the Euro will need to continue to monitor the region’s debt problems.  But in the UK, the central issues are different — centering mostly around consumer inflation prospects.

In Australia and New Zealand, it is important to monitor export markets (especially in emerging Asia), as this is where most of the forecasts for growth strength see their drivers.  But when looking at these issues, forex traders should mostly be using this information as a way of determining which currencies to buy in the event the Dollar starts to see a re-initiation of its broader bearish trend.  It will also be important to watch the policy statements that are seen by the central banks in each of these areas, as this will be key in determining the extent to which stimulus programs will be increased or decreased.

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