Posted on: 06 June 2016, by: Boris & Kathy, category: Market Review
Friday’s extraordinarily weak non-farm payrolls report sent the U.S. dollar tumbling against all of the major currencies. We haven’t seen a move this strong in 2 months for EUR/USD and more than a month in USD/JPY. The 2 year Treasury yield dropped by the largest amount since March 2009 and Fed Fund futures are now only pricing in a 29% chance of tightening in July down from more than 50% pre-NFP. A mere 38K jobs were created in the month of May, the weakest since September 2010 and while the data is distorted by the Verizon strike, even if you add back the 35K jobs lost, the number was still terrible. The unemployment rate hit its lowest level since 2007 but the improvement was driven by a drop in the participation rate. Average hourly earnings growth eased to 0.2% from 0.3%. The softness of today’s report has caused the market to downgrade its expectations for a summer rate hike and the question now is how that affects Janet Yellen’s thinking. She was unabashedly hawkish last month when she said a rate hike might be appropriate in the coming months. If she repeats this view and she could because of the consistency of t comments from U.S. policymakers and their overall view that the labor market is doing well, the dollar will rebound but don’t expect the greenback to recapture all of Friday’s moves. Significant technical damage was done and the weakness of Friday’s report will have investors eyeing every positive comment from Yellen with skepticism. In addition to the soft labor data, service sector activity also slowed. There are very few pieces of market moving U.S. economic reports on the calendar but even if there were, Yellen is the one to watch as her comments frequently sets the tone for trading and that’s true now more than ever.
Looking ahead, Janet Yellen’s speech on Monday is the most important event risk for the U.S. dollar. There are very few pieces of market moving U.S. economic reports on the calendar but even if there were more significantly releases, her comments frequently sets the tone for trading. At the end of May she sent the dollar soaring when she said a rate hike may be appropriate in the coming months. If she repeats this view with no hesitation the dollar will enjoy a healthy recovery against many major currencies. Even with the benign non-farm payrolls report, we see no reason for the Fed Chair to alter her hawkish views. However there’s one very important thing to keep in mind and that’s the negative seasonal bias for the dollar in June.
May was a very strong month for the U.S. dollar but June is typically more difficult. As you can see in the following table, the Dollar Index declined 8 out of the last 10 years in June and 6 out of the last 6 years. A large part of the move can be attributed to profit taking. However seasonality doesn’t always dictate the movements of currencies otherwise we would have 10 out of 10 years of consistent performance and that may be especially true this year because the Fed is gearing up to raise interest rates again and the U.K. is holding a referendum on E.U. membership. These unique factors could easily overshadow seasonal trends.
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