Payrolls Uncertainty Drives Wild Swings in Dollar
The U.S. dollar ended the day sharply higher against all of the major currencies but not before wild swings that took USD/JPY below 109.00 and then back above 109.50. EUR/USD soared to 1.1900 at the start of the NY open but plunged towards an intraday low of 1.1836 before the London close. We haven’t seen big intraday reversals like this in a while and the culprit was non-farm payrolls confusion. Private payroll provider ADP reported significantly slower job growth in the month of July that sent the dollar tumbling lower but when non-manufacturing ISM was released, investors were relieved to see service sector job growth. After contracting the previous month, the employment component of non-manufacturing ISM rose to 53.8 from 49.3. The PMI index rose to 64 from 60.1, a new record high that the sent the dollar soaring higher.
The whisper number for Friday’s non-farm payrolls report is a million jobs. The market had a violent reaction to both reports because the outcome will have a significant impact on how the U.S. dollar trades for the next few weeks leading into the Federal Reserve’s Jackson Hole summit. If the data is good, the dollar will soar on the prospect of a taper announcement later this month. However if payrolls disappoints, the dollar will slide as investors push their expectations for taper to September or later. Fed President Clarida said today that he can certainly see the Fed announcing a taper this year if conditions for substantial progress is met.
The impact of FX policy divergences on currencies is growing. Calls by local banks for a series of interest rate hikes in New Zealand drove the New Zealand dollar to its strongest level in nearly month before U.S. dollar strength stripped away the gains. Still, NZD was the only major currency to end the day higher versus the USD. The European Central Bank’s dovishness sent euro tumbling against most of the major currencies. Of course, it didn’t help that Eurozone retail sales rose less than expected and the Composite and Services PMI indices were revised lower.
Looking ahead, the main focus on Thursday will be the Bank of England’s monetary policy announcement. Like the Fed, U.K. policymakers believe that inflation increases are transitory but what separates the U.K. from the U.S. central bank is that the BoE saw overall price pressures as strong enough to reduce asset purchases earlier this year. The BoE is widely expected to raise their growth and inflation forecasts. The question tomorrow is whether they will proceed with further policy normalization. The Delta variant is a worry but since the country’s July 19th reopening, new coronavirus cases are trending lower. We believe that the BoE will grow more optimistic and less dovish but policymakers as a group will be divided on immediate tapering. At least one and likely two policymakers will vote for tightening in July. If there are more than 2, we could see a sharply positive reaction in sterling. Don’t expect anything new on rate hikes – the central bank is likely to confirm that significant progress still needs to be made before rate hikes are on the table.
Managing Director of FX Strategy BK Asset Management