Spring is here at last. After a long, cold, brutal winter, birds are singing, flowers are blooming, and the American economy is creating jobs. According to numbers released on Friday morning, the United States generated 192,000 new positions in March, while the participation rate rose.
That doesn’t mean that investors are dancing in the streets however. The number provided optimists with strong evidence that the economy is indeed on the path toward growth, but narrowly missed expectations. This intersected with a sharp correction in the technology sector to trigger turbulence across the equity markets, which continues this morning. In Asia and Europe, bourses started the week on a negative note, while North American indexes are poised for a weaker open.
More broadly, commodity prices continue to rebound from their February lows, providing support to currencies like the Canadian and Australian dollars. Both the euro and sterling remain rangebound, with a thin data calendar limiting speculative appetites. Yen weakness is again stalling in the mid 103’s.
The dollar is trading with a slightly weaker bias on expectations that the Federal Reserve will continue reducing stimulus spending – which is an interesting development.
Over the past year, positive data releases have tended to boost the dollar’s value, as market participants responded to improved investment opportunities and a potential tightening of monetary conditions.
This was a distinct departure from the pattern over the past decade, wherein positive data had the opposite effect. Stronger growth in the US generated an increase in imports from other countries and a widening in the trade deficit, meaning that the greenback fell as the economy improved.
If we are seeing a return to this dynamic, the implications for the currency’s path forward could be profound. The jury is out for the time being, given the number of other factors at play, but if the dollar continues to sell off on good news, market participants may need to prepare for prolonged weakness ahead.
Except….
The Canadian dollar is sitting near a six week high this morning, providing importers with a much-needed respite from the pummeling that has taken place thus far this year. The currency spiked upward on Friday after Statistics Canada reported that the country added 42,900 jobs during the month of March, while the unemployment rate fell to a four-month low. This was more than twice the number expected on Bay Street, and triggered a sharp short-covering rally in the dollar-Canada market.
In a development rich with irony, traders bought Canadian dollars in the belief that the currency’s weakness over the last six months would soon translate into stronger economic data. Positions predicated on further dovishness from the Bank of Canada were crushed, but we suspect that the exchange rate’s gains will be short-lived.
Jobs numbers over the past six months have ricocheted from one extreme to another, meaning that only the bravest market participant would extrapolate Friday’s result forward.
Looking at the details, almost all the net new positions were added in the public sector, while the majority of private sector roles were part-time and in the services. These are highly volatile areas, vulnerable to rapid shifts – meaning that veteran observers are likely to discount the number in the days ahead.
As such, we would suggest that importers immediately establish clear risk thresholds and protect themselves against a corrective reaction in the coming hours and days. Nothing in the markets is preordained of course, but if last week’s momentum isn’t sustained and we break the 1.1050 mark once again, today’s opportunities are unlikely to return.
Further reading:
JPY Up After NFP; More to Come – Elliott Wave Analysis
Share
