Dollar surges as US jobs data exceeds expectations and confirms robust economic outlook
Friday’s Nonfarm Payrolls data was far stronger than expected and put a fork in the speculation that May’s poor turnout of just 38,000 was a signal of stuttering US economic performance. That 255,000 jobs were added in July wasn’t the only highlight of the report, with the labour force participation rate also increasing, indicating that not only were over a quarter of a million new jobs created in the month, but there were also a greater number of people qualifying as part of the nationwide workforce – another sign of rude economic health.
Nonetheless, there were some downsides to the report. An increase in part-time employment suggests that many are having to make do with fewer hours at worse pay as they’re having difficulty finding a fulltime job. Furthermore, the ongoing dependency on the government and leisure & hospitality sectors suggests this trend in jobs growth could reverse if there was a downturn in economic performance due to, for example, a confidence shock following a surprise changeover in the Oval Office.
Rates outlook for the UK and US couldn’t be more at odds
As the Bank of England slashed rates to record lows last week, the Federal Reserve’s outlook continues to point to tighter monetary policy by the end of the year. Markets are now pricing in a 43% chance of a US rate hike by December 31st, a 12ppts increase following the Nonfarm Payrolls release on Friday.
The dollar’s strength against sterling throughout the latter half of last week knocked close to 2.5% off the GBP/USD rate and there’s little to suggest that this will be recouped in the coming days with a relatively quiet economic calendar and no key central bank meetings until the latter half of September.
Reserve Bank of New Zealand expected to cut rates to stem threats from slowing inflation
On Wednesday this week, the Reserve Bank of New Zealand is expected to justify a cut in interest rates to lows of 2.00% with the ongoing disinflationary pressure emerging from low commodity prices and a stubbornly strong NZD. NZD/USD remains close to 12 month highs, despite the USD’s dominance in FX markets over the past year or so, as the relatively higher interest rates in New Zealand (2.25% vs. UK’s 0.25%, Europe’s 0% and Japan’s -0.1-0.0%) has kept hot money flowing to its shores. While an interest rate cut shouldn’t be seen as a cure-all, the RBNZ are clearly hoping to keep the dangers of currency strength at bay on Wednesday.