The dollar is higher across the board as the February payrolls proved less poor than expected , showing a rise of 97,000 and overshooting whisper forecasts of as low as 60,000 including our forecast.
Although the three-month average of non-farm payrolls hit a seven-month low of 156,000, and despite the fact that construction, manufacturing and services jobs all headed lower in their three-month averages (see chart), markets are cheering today’s report due to the lower expectations set by the deteriorating U.S. data of the past week. Indeed, on the optimistic side, both the January and December figures were revised higher—to 146,000 from 111,000 and to 226,000 from 206,000 respectively—while the unemployment rate fell to 4.5% from 4.6%, derived from the household survey. Average hourly earnings rose to 0.4% from 0.2%, pushing the y/y rate to 4.1% from 4.0%. The report cements the notion of a softening U.S. economy and renders chances of a hard landing a 1/3 probability, especially with no improvement in the sector payrolls as seen in the chart below.
Trade gap drops but bilateral China deficit will not appease Congress
The trade balance came in better than expected at $59.1 billion from December’s $61.5 billion, in line with our forecast for an improvement in the trade gap, which is also helping lift the dollar. Imports fell 0.5% to $185.5 billion while exports rose 1.1% to $126.7 billion, signaling the best of both worlds from falling oil prices (-5.0% and -3% in Jan and Dec) and strengthening demand from overseas. The trade deficit with the Euro zone plunged 32% to $4.96 billion. The overall report helps appease concerns of any deterioration in the structural U.S. imbalance, but the oil rebound in February and March should also be born in mind for the incoming reports.
Despite the drop in the overall trade deficit, the bilateral gap with China rose 17% to $21.7 billion, which is also higher than the figure of January 2006 of $17.9 billion.
EUR/USD falls in line with our bearish note this morning forecasting a decline below the 1.31 figure, but support seen holding at just below 1.3060 as selling stabilizes ahead of an array of potentially negative U.S. data (retail sales, industrial production, Philly Fed, Empire Manufacturing and TICS). Interim upside remains capped at 1.3170.
USD/JPY breaks above our resistance of 119 but is expected to encounter resistance at 118.5, just above the 50% retracement of the 121.63-115.19 move. Contrary to what many pundits have claimed, the unwinding of the carry trade was behind earlier yen gains, but selling has stabilized due to improved global appetite. Renewed unwinding is far from over as long as the risk of negative U.S. data continues to loom and the negative 10-year/two-year spread does not deteriorate beyond the -10 bps territory. It is currently at -7 bps. A decline in this negative spread or a move towards positive territory signals falling liquidity and higher expectations of a Fed easing.
Ashraf Laidi Chief FX Analyst CMC Markets US 140 Broadway, 30th Floor New York, NY 10005 (212) 644-4220 (212) 644-4222 fax
a.laidi@cmcmarkets.com
