US Employment Data to Set Dollar’s Course

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Marc Chandler
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Overview: The focus is squarely on the US employment report. At the risk of oversimplifying, given the position adjustment in the past 48 hours, a solid report can see the greenback recover, while a disappointing report will likely see it deepen the correction of the rally that began with the February jobs report. The dollar recovered in the North American afternoon yesterday and many observers attributed it to the bevy of Fed comments. Yet, the interest rate market saw little reaction. It seemed that it was the dramatic reversal in US equities that helped dragged global shares down today, that forced US rates lower.  Asia Pacific equities tumbled, led by more than 1% losses in Japan and South Korea. Europe's Stoxx 600 is off around 1.2%, and if sustained, could be its biggest loss so far this year. European benchmark yields are 1-3 bp firmer. The 10-year Treasury yield is up a couple of basis points to 4.33%. It settled near 4.20% a week ago. 

The dollar is narrowly mixed against the G10 currencies, with the rally in oil giving the Norwegian krone the biggest lift (~0.3%), while the Swiss franc is the softest (~-0.2%). Emerging market currencies are mostly firmer. The timing of the reversal coincided with reports of Israeli Prime Minister Netanyahu signaling an escalation of the Middle East crisis by warning of confrontation with Iran and its proxies. May WTI bottomed near $84.65 shortly after midday in NY and within a few hours had reached through $87.20. It is consolidating in a narrow range above $86.35 after yesterday's big outside up day. Gold retreated to about $2268 today but has rebounded back above $2290 today.

Asia Pacific

The 1.5% month-over-month rise in Japanese retail sales in February hinted today's better household spending report. In February, household spending fell by 0.2% year-over-year; considerably better than the 2.9% decline median forecast in Bloomberg's survey. It is the smallest decline since last February when household spending rose by 1.6% year-over year. Spending rose by 1.4% month-over-month, the first increase since last September. As measured by GDP figures, Japanese consumption fell in the last three quarters last year, and economists in Bloomberg's survey anticipate a small decline in Q1 24. Looking ahead, the energy subsides are reduced this month and end next month. In June, income tax cuts will be implemented. Note that February labor earnings are due first thing Monday, but it is too early to see the impact of the annual wage round. Besides the wage data and February's current account, which is also to be announced Monday, the highlight of the week may be Prime Minister Kishida's visit to Washington. Security issues will be paramount. We had thought there was a reasonably good chance that Japan would be invited to join the AUKUS arrangement in some capacity. However, with Philippines' President Marcos also arriving for a triparty summit on April 11, a new security initiative may be announced.

Australia recorded an A$122.7 bln trade surplus in 2023, down from A$139.9 bln in 2022. It is off to a slower start this year. The February trade surplus, reported earlier today, of A$7.28 bln was considerably smaller than expected (~A$10.5 bln). That means that in the first two months of the year, Australia's surplus is running nearly 20% lower than in the Jan-Feb 2023 period. Goods exports fell by 2.2% while imports rose by 4.8% in February. Goods exports fell by an average of 0.4% a month last year, and that includes an average increase of 1.3% in Q4 23. Exports rose by 1.2% on average a month in 2022. Goods imports were flat last year, and that includes an average monthly decline of 2.5% in Q4 24. Australia's terms of trade (ratio of export and import prices) set a historic high in Q2 22 and deteriorated last year. 

The dollar was confined to a narrow range against the yen for most of yesterday (~JPY151.55 to JPY151.85). It broke down as cross positions were unwound and fell to almost JPY151.10. The losses were extended in early Asia Pacific trading to about JPY150.80 after the better-than-expected Japanese spending data. The exchange rate did not react to Prime Minister Kishida's threat to act against "excessive yen moves," or BOJ Governor Ueda's suggestion in an interview that summer-fall time period for another hike. In fact, the dollar has gradually recovered to around JPY151.40 today. Still, the inability for the dollar to take out JPY152 shows the power of the communication channel rather than material intervention. Like China's push back against the weakening of the yuan, the broadsides about race to the bottom, seem misplaced. The Australian dollar powered through a trendline that connects the late December high (~$0.6870), the March 8 high (~$0.6670), and the March 21 high (~$0.6635). It came in slightly below $0.6600 yesterday. Despite the intraday penetration, the Aussie's gains were pared in the North American afternoon, and it settled near $0.6585, but still above Wednesday's high (~$0.6570). It has traded in about a third of a cent range today below $0.6600. On a strong US employment report, the Aussie could fall back toward the $0.6535 area. The dollar was so close to the upper end of its band against the yuan that before the yesterday and today's holiday some very short-dated swaps, which implied a move outside the band, were rejected. However, since it is arguably a dollar move taking place, a soft US jobs report, would likely take some pressure off the PBOC. The greenback slipped to an eight-day low against the offshore yuan (~CNH7.2410) but remains above the onshore band (CNY6.9530-CNY7.2368). Monday's fix will be important. 

Europe 

A notable recent development in the eurozone is the outperformance of the periphery compared with Germany and France. This was evident in March PMI. Italy and Spain's composite readings were above 50 while Germany and France remained below. This divergence was also, at least partially, evident underneath today's news that February retail sales fell by 0.5%, a little more than expected. It was also seen in the today's data. French industrial output rose 0.2% in February, half of what was expected. Spain's industrial output rose by 0.7%, well above the 0.2% median forecast in Bloomberg's survey. Germany reported February factory orders eked out a 0.2% increase. The market had expected a 0.7% rise. However, even this small gain was marred by the downward revision to January's series to show a 11.4% drop instead of 11.3%.

Italy's 10-year premium over Germany dropped from over 200 bp last October to almost 120 bp in the middle of last month. That was the least since late 2021. It recovered and reached almost 145 bp earlier this week and is back around 140 bp now. Spain's premium has a similar broad pattern. It premium over Germany peaked last October near 115 bp. It slipped below 80 bp in the middle of March, the least in two years. It widened a little into the end of the quarter but is narrowing again and is near 84 bp. Within the eurozone this year, only Cypriot 10-year bonds have outperformed Italy's BTPs (-7 bp vs. +10 bp). Next week's highlight is the ECB's meeting. The most that can be reasonably hoped for is more guidance from President Lagarde for a cut soon (June meeting next). The swaps market has nearly completely priced out a cut at next week's meeting. It has been last fully discounted at the end of July and has not been more than half priced in since mid-February. 

The UK's manufacturing and services PMI have entered expansion territory above 50 and the construction PMI, released earlier today joined them with a 50.2 reading for the first time since last August. It has risen for four consecutive months. Still, the swaps market has boosted the chances of a June cut to about 80%, among the highest in two months. The highlight next week is February's monthly GDP print. In February, the Bank of England projected 0.1% growth in Q1 24, but this looks a bit conservative. Given the 0.2% expansion in January, it would seem to imply weakness in February and March. 

A little before the last US jobs report, the euro was near $1.0980. The three-day rally through yesterday saw the euro recover from $1.0725 to almost $1.0880. The (61.8%) retracement of the euro's loss since the March high is slightly higher near $1.0885. The euro surrendered its gains and returned to the $1.0830 area. It is consolidating in about a fifth-of-a-cent range below $1.0845. A disappointing US employment report could see the euro test the $1.0920-30 area, while a solid report could perhaps see the $1.0780. There are options for about 1.5 bln euros at $1.08 that expire today. Sterling rose to a two-week high near $1.2685 and met the (38.2%) retracement target ($1.2675) of the decline since the last US jobs report, before reversing lower, falling to about $1.2635. Today, it is in about a third-of-a-cent range below $1.2650. It had bottomed Monday and Tuesday near $1.2540. Sterling had set the Q1 24 high slightly before the last US employment report in early March near $1.29. The next retracement target (50%) is near $1.2715 and disappointing US data could spur a run toward it. Favorable US data could see sterling push below $1.2580. 

America  

The US dollar's setback in recent days is reminiscent of what happened last month. The Dollar Index sold off by about 1.5% in the couple of days leading up to the February jobs report. It set a six-week low (~102.35) shortly before the jobs report before launching a rally that carried it to a new high for the year (~105.10) earlier this week. Since the high, the Dollar Index has pulled back by about 1.2%. Dollar bullish short-term momentum players and trend-followers have likely moved to the sidelines. Like last month, a solid jobs report can see the dollar recover. Some observers talk about a seasonally weak job growth in March, but in the past 20 years, it has been a 50/50 split between times when March nonfarm payroll growth was stronger than February and weaker.

The pandemic may have changed the pattern, and the data are seasonally adjusted. In the last two years, March job growth was weaker than February's by an average of about 255k. The median forecast in Bloomberg's survey looks for US businesses to have added around 62k fewer jobs last month than February (213k vs. 275k). Average hourly earnings are expected to rise by 0.3%, and that would bring the Q1 increase at an annualized rate to 3.6% after a 4.0% pace in Q4 23 and a 4.4% increase in Q1 23. However, the relationship between nominal wage growth and CPI/PCE deflator is tenuous. Productivity matters, of course, and most economists still seem to be working on assumptions of competitive capitalism instead of what exists today, oligopolies and monopsonies. Moreover, next week's March CPI will likely see the year-over-year headline rate accelerate and the core rate stable or slightly lower. The net effect, we suspect, between the employment and CPI, will do little for the Fed's confidence.

Canada reports its March jobs data as well, but it tends to be overwhelmed by the US report. Canada created an average of about 39k jobs a month in January and February, which is on par with the recent pace (34k in 2022 and 37k in 2023). Of the jobs created this year, about 30k on average were full-time posts, slightly better than the 28k average last year and somewhat softer than the 37k average in 2022. Still, Canada's challenge is that the labor force growth is faster than job creation, resulting in rising unemployment. The unemployment rate was at 5.0% from December 2022 through April 2023. It has risen steadily since then and has been at 5.8% for three of the four months through February. The median forecast in Bloomberg's survey is for it to have ticked up to 5.9% in March.

The US dollar initially extended its recent losses and slipped slightly below CAD1.3480 to record a two-week low. There are options for about $1.25 bln between CAD1.3500 and CAD1.3510 that expire today. However, in the North American afternoon, the greenback staged a broad recovery and set new session highs against slightly above CAD1.3560, leaving a potentially bullish hammer candlestick pattern in its wake. Follow-through gains today has seen the US dollar rise to CAD1.3580. A solid US jobs report could see the recent highs near CAD1.3615. There are options for about $635 mln at CAD1.36 that expire today. The greenback traded below MXN16.50 yesterday for the first time since the end of 2015 but reversed higher to a new session high near MXN16.6150. It has traded between MXN16.55 and MXN16.61 today. This week's high is closer to MXN16.67. The 20-day moving average is around MXN16.68 and the dollar has not above it since the end of February. The dollar had set a new high for the year against the Brazilian real on Wednesday a little above BRL5.09. It reversed lower and settled on the lows. Follow-through selling took the greenback to about BRL5.0050 yesterday before the broad recovery, which lifted the dollar to new session highs above BRL5.05.