NEWS / Foreign Exchange

Unemployment Rate is Key for Fed Assessment

Little activity in FX as European markets close for Good Friday Holiday. US stock markets are closed while the bond market remains open until 10:30 am EST. Today??™s much anticipated release of the US labor report (8:30 am EST) is expected to show a rise 130K in March non-farm payrolls from 97K, with the unemployment rate seen rising to 4.6% from 4.5% and average hourly earnings slowing to 0.3% from 0.4%. Our forecast is for payrolls to rise by 115K, with the jobless rate at 4.6% and average hourly earnings at 0.4%.

As in previous releases, a key part of the payrolls report influencing markets is the extent of revisions of previous figures. Thus if February??™s 97K payrolls are revised upwards by say 10-20K and March payrolls come in at 110K, the dollar may remain generally supported.

We should also note that record February decline in construction jobs may be revised downwards, or produce a payback in March, in which case may help the overall reading. But it is also worth mentioning that the paltry reading of 97K jobs in March payrolls was aided by a 39k increase in government jobs, which is an unusually sizable increase in that sector. A pay back from government and construction jobs may be offset by one another, but the overall trend remains markedly down as indicated by the 3-month moving average in services, manufacturing and construction.

The unemployment rate will also be a factor. Since the bond market seems to be more receptive to a Fed rate cut in H1 than the Fed, the reaction to the unemployment rate should be significant, with a rise to 4.6% from 4.5% likely to weigh on yields and on the dollar. A rise to 4.7%, and/or an upward revision in the February rate to 4.6% from 4.5% would be especially dollar negative.

Finally, the average hourly earnings figure remains worthy of scrutiny due to the Fed??™s prolonged inflation preoccupation. The month to month rate is expected at 0.3% from 0.4%, bringing the year on year rate to 4.0% from 4.1%. A rise to 0.5% or another reading at 0.4% would be dollar positive, while a 0.3% reading may be neutral-depending on the other variables in the report.

Extremely thin trading conditions may cause sharp market moves, especially with a multi-variable report such as the US labor report. The dollar??™s weak bias against the euro could be especially increased in the event that the figures come in line with our expectations. Our take is that as long as the unemployment rate rises from 4.5% and payrolls remain less than 115-120K, the dollar is to maintain its overall bearish tone.

Cable??™s remains technically negative

The technical deterioration in GBPUSD following this week??™s Bank of England decision to keep rates on hold means that the pair could prolong declines towards 1.9650s and onto 1.9630s. This is especially the case that US payrolls come in at least within expectations. A weak jobs report could trigger a kneejerk reaction towards 1.9740, but resistance seen standing at 1.9770. The daily candle suggests cable to end the day lower than 1.9690s close to the 1.9670s.

Euro positive sentiment seen extending to next week

The euro??™s climb to a fresh 2-year high at 1.3440 is partially explained by market chatter of a possible ECB rate hike next week coupled with market pessimism ahead of today??™s US jobs. Although the ECB is thought more likely to make a move in May, markets evaluate the possibility for a tightening after the predominantly stronger than expected figures from Eurozone and Germany in particular.

We expect EURUSD to remain near the higher end of its trading ranges, with thin volumes apt to extend gains towards the 1.3440s and 1.3470. A payrolls figure below 100K is seen pushing the pair towards 1.3470s and onto 1.35, especially if the unemployment rate climbs to 4.6%. Support seen holding up at 1.3380, followed by 1.3360.

USDJPY remains capped at 119.20

USDJPY has proven its struggle to breach the 119.20 resistance, while backed by solid support at 118.45-50. The downward channel on the 4-hour chart suggests interim resistance at 118.90, with ample downside towards 118.60s.  A successful break of the 118.50 trend line support would not be valid until the 118.40 is taken out. Subsequent support stands at 118.00, followed by 117.60.  

USDCAD eyes 200 day MA at 1.1473

USDCAD??™s accelerating downward momentum, makes the prospects of a recovery limited at 1.1530 and 1.1550s. With CAD fundamentals especially bolstered by yesterday??™s IVEY index and jobs report, the pair remains technically and fundamentally pressured. A lackluster US payrolls report seen extending pullback towards 1.15 and onto the all important 200-day MA (1.1473) which ahs not been breached since November.

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