U.S. nonfarm payrolls posted a 62,000 decline in February (consensus +25,000) following a revised -22,000 from the previous -17,000 reading. The unemployment fell to 4.8% from 4.7% (consensus 5.0%), while average hourly earnings rose 0.3%, translating into an annual growth rate of 3.7%.
The dollar began to rally on the unexpected decline in the unemployment rate but is now broadening its gains on the Federal Reserve’s announcement that it would step up its liquidity operations, which may reduce the likelihood of a 75 basis point rate cut this month. The unemployment rate had fallen due to a shrinking labor force and declining participation rate. Sharp losses in equities are likely to help the dollar stabilize against the high yielders (Aussie, kiwi and even EUR), but losses are expected to be pronounced against JPY and CHF. We continue to warn that USD/CHF has a 70% probability of hitting parity as the franc’s gains have outpaced those of the yen. More on FX reaction below.
The weakness in payrolls is especially highlighted in the following:
The three-month average of payroll has fallen to 15,000, the first negative figure since August 2003.
Payrolls in the once strong services sector fell to a three-year low of 26,000, well below their three-month average of 57,000, which is the lowest since August 2003.
Retail payroll in December and January were revised to negative, leading to a negative reading in the last three months (Dec, Jan and Feb), which is the longest strong of below-zero readings since December 2005 to February 2006.
Despite the poor jobs report, equity futures are showing a rise after the Federal Reserve announced it will raise the amount of liquidity in its Term Auction Facility (TAF) to $100 billion to "address heightened liquidity pressures in term funding markets.” Separately, the European Central Bank (ECB) has issued a statement indicating it is willing to provide extra dollar liquidity, as it did back on January 22 and December 12. The Fed has just announced it will conduct its first 28-day term repo operation today and make it into a weekly basis.
Fed funds futures are now pricing more than 30% chance of a 2.0% rate by June, which has been our assessment since Bernanke’s speech last week. The steepening yield curve is further widening the 10-year/two-year spread to 210 pts, largely due to declines on the short end, rather than increases on the long end, as markets price more than 50% chance of a 75 bp rate cut this month. This also means that the markets’ pricing expectations are allowing for the probability of an inter meeting rate cut prior to the March 18 meeting.
Inter meeting Fed cut warning
Despite expectations of renewed loses in USD vs. JPY and CHF, we caution against the increased probability of an emergency Fed rate cut in which case it will trigger USD/JPY to as high as 102.80 and USD/CHF to 1.0260. GBP/CHF rebound may extend 2.07, while EUR/GBP eyes 0.7580. The Fed is in the process of gauging activity in the inter bank market before possibly following up with an inter meeting cut if need be. Meanwhile, we expect neither the momentum in EUR or gold to have waned as the current pullback is largely technical than fundamental. EUR/USD support stands at 1.5290, GBP/USD at 2.0080 and AUD/USD at 0.9270.
Ashraf Laidi
Chief FX Strategist
CMC Markets US
a.laidi@cmcmarkets.com
