USD: Don’t Fight The U.S. Data Trend

• Dollar – Don’t Fight the US Data Trend
• EUR – More Greek Drama Next Week
• GBP Consolidation Likely Ahead of Quarterly Report
• CAD – Canadian Job Growth Beats But Details Weak
• AUD Supported by PMI Data
• NZD – Tons of Chinese Data Next Week

USD: Don’t Fight The U.S. Data Trend

Don’t fight the trend in the U.S. economy or the U.S. dollar – that is the lesson to learn from Friday’s non-farm payrolls report. While six out of eight labor-market indicators that we track for payrolls pointed to a weak release, the U.S. turned out another month of strong job growth. For the past week, investors were skeptical about the Federal Reserve’s commitment to raising interest rates this year with many arguing that this month’s NFP report would encourage the central bank to be more patient. After the release, however, it is clear that there is a strong underlying trend in the labor market and the U.S. economy that the Fed cannot ignore. Earlier this week, many traders took profit on their long dollar positions and there’s no better reason to buy dollars now than the latest NFP report. Central banks around the world have been easing monetary policy, making their currencies less attractive relative to the dollar. With concerns for a weak jobs number eliminated by Friday’s report, the dollar should see further gains in the coming week.

Our leading indicators for non-farm payrolls weren’t entirely wrong – fewer jobs were created in January. However, what was surprising was the upward revision in December. Instead of 252k jobs, 329k jobs were created at the end of the year. The main focus Friday was average hourly earnings – which rose by the largest amount since July 2011. Investors were hoping for a 0.3% rebound and they got much more than that with a 0.5% gain. The unemployment rate ticked up to 5.7% but the market overlooked this deterioration because of the steep decline in recent months and the increase in the labor force participation rate. In a nutshell, Friday’s strong report keeps the Fed on track to raise interest rates in the second half of the year. With only retail sales and the University of Michigan Consumer Sentiment Index scheduled for release next week, we expect the dollar to extend its gains against most of the major currencies, particularly given the sharp rise in Treasury yields. More specifically, USD/JPY is on track for a move to 120 and EUR/USDto 1.10, barring a surprise deal between Greece and its creditors.

EUR – More Greek Drama Next Week

The better-than-expected U.S. jobs number drove the euro sharply lower against the U.S. dollar. German industrial production also surprised to the downside but the report had very little impact on the EUR/USD, which was in positive territory up until the NFP release. Friday’s strong labor data widens the gap between the Eurozone and U.S. economies. Based on the outlook for monetary policy alone, EUR/USD should be on its way to 1.10. However the outlook for currencies are rarely that simple and particularly not for the euro because the currency pair is deeply oversold with an extremely large amount of short positions. The trend of EUR/USD could easily be reversed in the coming week if Greece reaches a debt deal with Europe. While this may not change the long-term trend of the EUR/USD, it could trigger a particularly nasty short squeeze. There will definitely be more news flow on Greece next week with Eurozone Finance Ministers scheduled to meet on Wednesday February 11 to discuss next steps for the country followed by a meeting of EU leaders on Thursday. Time is of the essence because Greece could run out of cash as early as March. Any willingness to negotiate would be positive for the EUR/USD while any resistance would exacerbate the losses. Since it is in no one’s interest for Greece to default on its debt, we believe that a deal will be reached eventually. Until that happens, EUR/USD will remain under pressure. There are a handful of Eurozone economic reports on the calendar but nothing important until Friday’s Q4 GDP numbers.

GBP Consolidation Likely Ahead of Quarterly Report

The British pound traded lower against the U.S. dollar Friday on the back of weaker U.K. trade data and stronger non-farm payrolls. Despite the improvement in manufacturing activity, the U.K. trade deficit ballooned to 10.2 billion pounds from 9.3 billion pounds in December on a sharp rise in oil imports. Exports also increased but the 0.1% gain hardly makes a dent in the 2.7% increase in imports that show companies taking advantage of the fall in prices. While we still believe in the outperformance of the U.K. economy, sterling may have a tough time extending its gains ahead of next week’s Bank of England Quarterly Inflation Report. The recent improvements in manufacturing-, construction- and service-sector activity restored expectations for 2015 tightening despite less dovish BoE minutes. The Inflation Report will indicate whether this thinking is consistent with the central bank. More specifically, we’ll be looking to see if the report provides any clues on the timing of the first rate hike. Chances are, however, that it won’t because U.K. policymakers are divided on when rates will rise.

CAD – Canadian Job Growth Beats But Details Weak

The U.S. wasn’t the only country to release labor market numbers on Friday. In Canada, more than 35k jobs were created in the month of January, which compares to a 5k forecast. The unemployment rate also fell to 6.6% from 6.7% as the labor force participation rate held steady at a multi-year low of 65.7%. At first glance this was a very strong labor market report for Canada but the breakdown in job growth was less encouraging as all of the jobs created were part time. Full time employment declined by 11,800 while part-time employment rose by 47,200. In a healthy economy, we always want to see more full-time than part-time employment growth and the lack of full-time jobs explains why the Canadian dollar failed to rally Friday. However the report was not unambiguously negative and when combined with the extended recovery in oil prices, we could still see a recovery in the Canadian dollar in the coming week, especially if oil continues to trickle higher. The Australian and New Zealand dollars were also negatively affected by the U.S. jobs number but AUD/USD still managed to end the day in positively territory thanks to an increase in the PMI Construction index overnight. Australian employment numbers are scheduled for release next week and this report could determine whether the currency pair recaptures 80 cents.