Hoping For A USD Bottom? Don’t Bank On Payrolls

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

It was a hard week/month for the U.S. dollar, which traded lower against nearly all of the major currencies. Investors completely disregarded the tinge of optimism about global markets in the FOMC statement and according to the Fed fund futures strip they still don’t think the central bank will be able to pull off a rate hike this year. The U.S. is releasing nonfarm payrolls next week and traders shouldn’t expect it or the two ISM numbers (manufacturing, non-manufacturing) to provide much support for the greenback. Even though the abundance of Fed Presidents -- including 2 FOMC voters -- are likely to say that June is a live meeting and that rates will rise this year (and that the market is underpricing tightening -- a message they consistently repeat -- it won’t convince investors that the central bank will hike at its next meeting.

Based on the FOMC statement, the Fed has moved closer to tightening but the chance of a rate rise in June is next to zero because policymakers are still split on the balance of risks. Unless stocks climb to record highs, the next 2 payroll reports rise 275K or more, average hourly earnings increase consistently AND consumer spending exceeds 0.5% in April and May, they won’t be tightening until September at the earliest. Positive economic data will help the dollar but it won’t be enough to turn the greenback and, more importantly, sentiment around. The only thing that matters are expectations -- the Fed remains hawkish and yet the dollar falls. The BoJ and RBNZ are dovish and their currencies rise because investors see this as a confirmation of the impotence of central banks. The dollar could remain under pressure until investors are more confident that these and other central banks will resume their intended policy actions.

While part of the slide in USD/JPY is caused by U.S. dollar weakness, the slide could gain traction as corporations renew their hedges. When USD/JPY bounced off 108 in early April, rallying as high as 112, many corporates felt less urgency to hedge the downside risk because the currency pair appeared to have bottomed. However the magnitude of Thursday’s move along with the new 18-month low has corporations scrambling to protect against further yen appreciation. Unfortunately that process adds pressure on USD/JPY. Clearly the record level of long-yen-short-dollar positions in the futures market doesn’t accurately reflect spot-market exposure because there’s still money on the sidelines that moved to sell USD/JPY. We see an easy slide to 106.65, the 38.2% Fibonacci retracement of the 2011 to 2015 rally followed by a quick move below 106. Trading on the 105 handle however will be choppier.

In contrast to the dollar, it was a great week for the euro. EUR/USD appreciated every day this past week with the latest gains supported by stronger GDP numbers. The Eurozone economy expanded 0.6% in the first quarter, which was better than expected and two times faster than the pace in Q4. Investors shrugged off the weakness in other releases including a larger decline in Eurozone consumer prices and a big drop in German retail sales. Consumer spending in Europe’s largest economy has been exceptionally weak this year with annualized sales gains slowing to 0.7% in March from 5.5% in February. These low readings raise concerns about Europe’s recovery, especially going into the uncertainty that Brexit could create for the region. Although EUR/USD broke above 1.1400 Friday, the main resistance is at the April high of 1.1470. The Eurozone is light on data next week so Draghi’s speech will be the main focus.

For once, sterling failed to extend its recent gains amid mixed economic data. Consumer confidence turned negative in April according to the GfK confidence index and mortgage approvals rose less than expected while net consumer credit and net lending was strong. Sterling has been one of the strongest currencies this month and while data has mattered little, we still believe that the sustainability of its gains hinges on the performance of the economy. That is why next week’s PMI reports are so important. If manufacturing and service-sector activity grow at a faster pace, GBP/USD could reach 1.4800. However weak numbers could mark a near-term top for GBP/USD near its February high of 1.4670.

The Canadian, Australian and New Zealand dollars held onto their gains. Canada’s economy contracted by 0.1% in February, which was slightly better than expected. What’s important though is that oil prices remain firm. The New Zealand dollar benefitted from stronger business confidence and a nice increase in the ANZ activity outlook survey (it shrugged off lower building permits). AUD was unfazed by its weaker PPI report because of the earlier CPI release. For the commodity-producing countries, the big focus next week is Chinese data, the Reserve Bank of Australia’s monetary policy announcement and Canadian employment. A small subset of investors is looking for a rate cut from the RBA after this week’s CPI report and for Canada, a slowdown in job growth is expected after last month’s strong release.