The US dollar traded sharply higher against all of the major currencies on the back of Friday’s non-farm payrolls report. A total of 224K jobs were created in the month of June, significantly better than the 160K forecast. Frankly, we are surprised by the sustainability and magnitude of the dollar’s move because the rest of the labor market report was underwhelming. Last month’s weak 75K print was revised lower and not higher, the unemployment rate increased and most importantly wage growth held steady at 0.2% instead of rising to 0.3% like economists anticipated. However the broad based rally in the dollar tells us that many concerns were eased by the June jobs report as investors viewed the jobs number as an excuse to reinitiate their long positions. Despite the Federal Reserve’s shift to a dovish bias the US dollar keeps rising for one simple reason – the outlook for the US economy is brighter than its peers. Data is still surprising to the upside and stocks are hovering near record highs. There is no imminent threat to the economy and despite the critics President Trump’s trade policies have made foreign investments less attractive than US ones.
The US dollar could extend its gains this week but we can’t see how one month of stronger job growth accompanied by no improvement in wage growth can be game changer for the Federal Reserve. Yes, it reduces the need for an immediate interest rate cut, but it doesn’t eliminate it. Nearly half of the members of the FOMC feel that easing is necessary this year and they won’t be swayed by a mixed jobs report and this week’s FOMC minutes should remind us of the extent of the central bank’s dovishness. Their concerns center around trade and inflation and while the US and China agreed to restart trade talks at G20, only time will tell whether the progress is real. Inflation will take a lot longer to improve and investors will get better sense of the extent of the problem with the release of consumer and producer prices this week. If price pressures ease, the expectations for a rate cut will intensify. What the jobs report does imply though is that Fed could opt for a one and done insurance cut with no signal of additional easing. As this would less dovish than other central banks, it would be positive for the dollar but we won’t know which way they’ll lean until the FOMC meeting.
Meanwhile Friday’s US and Canadian jobs report marked a turning point for the Canadian dollar. After falling for 8 out of 9 trading days, USD/CAD rebounded as the market learned that in the month of June, more than 2K jobs were lost in Canada compared to forecasted growth of 10K. Despite the slide in the currency, the data wasn’t exceptionally weak because full time jobs increased and wage growth accelerated. The Bank of Canada meets this week and as the last man standing, everyone is wondering if their central bank will finally turn dovish. When they met in May, the BoC put on a brave face and described their recent slowdown as temporary. Since then we have seen the first signs of weakness in Canada’s economy but it is too early to tell whether this is a slowdown or normalization. Retail sales barely grew in April but that was after very strong spending in March. Jobs were lost in June but May was a record breaking month for the labor market and wages growth accelerated. As these are tentative signs of slowing we think the Bank of Canada may want more evidence before turning dovish. So if they maintain their positive outlook and say the recent data misses are temporary USD/CAD will resume its slide towards fresh 1.5 year lows. However if the tone of their monetary policy statement is more cautious, we could see the beginnings of a longer term bottom in USD/CAD.