Dollar rebound cut short by US payrolls report
The dollar rallied late in the week against its G10 peers, only to give up most of those gains after a mildly
disappointing payrolls report on Friday.
The jobs data is still hard to interpret, but other measures of world growth continue to show signs of strength
and inflationary pressures are not letting up. Most emerging market currencies managed to end the week
higher, as commodity prices continue to rise. The Brazilian real was the undisputed winner among the majors,
with the New Zealand dollar the worst performer.
Two events will dominate traders attention this week, both on Thursday, starting with the June meeting of the
ECB. While no change in monetary policy settings is expected by us or the market, there is the potential for a
slightly less dovish set of communications than the market is expecting, which could provide a boost to the
common currency. As the meeting happens, we will receive the May inflation report from the US, so Thursday
afternoon promises to be a volatile time for trading.
The strength in the PMIs of business activity for May and recent less-than-dovish comments from Bank of
England policymakers raise the prospects that the UK may actually lead both the Federal Reserve and the ECB
in hiking rates. We think this possibility is behind much of the recent strength in the pound, and recent
economic data continues to support that thesis, particularly last week’s services PMI that rose to its highest
level on record.
There are no market-moving releases this week that will add much information to the current picture, so expect
sterling to trade off events elsewhere, notably the ECB meeting on Thursday.
The May flash inflation report out of the Eurozone made it clear that it is not exempt from the inflationary
pressures that are building up worldwide. The headline rate finally broke above the 2% level for the first time
since 2018. The core rate rose more modestly to 0.9% and is still below the ECB’s target. We think there is
plenty of room for upside surprises here in the coming months.
The key to the ECB meeting this week will be whether the “significantly” higher rate of bond purchases
announced in May is scaled back in view of the strengthening economy. We think the ECB is not quite ready to
take that step, though the staff forecasts will certainly reflect a more optimistic outlook. Overall, we expect the
euro to drift higher, though more as a result of general dollar weakness than specific euro strength.
The US payrolls data for May provided further confirmation that supply constraints are becoming the
bottleneck to US growth, and that excess demand will continue to put upward pressure on prices. The headline
number of 559k jobs looked healthy enough, but it fell short of consensus, and the labour force participation
rate stagnated. Wages rose more-than-expected, in another sign that employers are competing harder to fill
We think that generous unemployment benefits, closed schools and worker relocation during the pandemic will
continue to constrain hiring and thus booming demand will result in increased inflationary pressures over the
next year at least. If the Federal Reserve fails to respond, as seems likely, we do not think this will be positive
for the dollar.
The Swiss franc ended last week around the middle of the pack of G10 currencies in the performance tracker,
while the EUR/CHF rate edged down closer to the 1.09 level. The franc appears to have been boosted by a
decline in US yields in the second half of the week. Last week’s economic data from Switzerland was mixed, but
overall continues to point to a recovering economy. Particularly welcome was a decline in unemployment,
which should make room for a rebound in internal demand as the country eases COVID-19 restrictions.
This week’s calendar for Switzerland is quite light. The key inflation data print is already behind us, with
consumer price growth surprising slightly to the upside, which fits into the picture of inflation rebounds
elsewhere in Europe and across the pond.
Last week was a very volatile one for the Australian dollar, although this was driven almost entirely by outside
forces. The currency fell sharply versus the broadly stronger USD on Thursday morning, breaking out of its
recent range that it has occupied since mid-May, before rallying after the US payrolls report to end the week
only modestly lower. Aside from last Tuesday’s RBA statement, which delivered another dovish assessment on
rates, there wasn’t too much news to write home about. The Q1 GDP data was modestly
stronger-than-expected. Growth of 1.1% quarter-on-quarter returned in the first three months of the year
(above the 0.6% estimate), although the considerable lag in the data meant that it was largely overlooked.
The more timely trade data for April was, however, encouraging with exports increasing by 3%
month-on-month. An upgrading of Australia’s rating outlook to ‘stable’ from ‘negative’ by S&P on Friday is also
a welcome development, although again we’ve not seen too much reaction to the news from investors. With
few data releases scheduled for Australia this week, we think that AUD could once again be driven by external
CAD ended trading last week around the middle of the G10 performance tracker, edging modestly lower
versus the US dollar. Friday’s Canadian labour report was a disappointment, partly offsetting some of the
upside from a similarly underwhelming jobs report in the US. A net 68,000 jobs were shed in Canada in May as
the COVID-19 lockdowns dragged on for yet another month. The jobless rate also ticked higher to 8.2%,
although this would have been considerably higher (almost 11%) had it included those discouraged workers
that dropped out of the labour force. Yet, with vaccinations now taking place at a very swift pace in Canada, we
are hopeful that this trend will be reversed in the coming months.
The Bank of Canada will take centre stage on Wednesday when the latest policy decision is announced. We
expect no change this week, although think that the BoC could tee up an additional unwinding in stimulus
measures in the third quarter, which may provide some upside for CAD in the second half of the week.
A surprise to the downside in this morning’s trade data has not had too much of an impact on the yuan, which
edged lower last week to around the 6.40 level versus the dollar. Export and import growth fell short of
expectations, although still grew handsomely on this time last year. Total exports grew by 27.9% year-on-year
in May, well short of the 41.6% pencilled in by the market. This suggests that global demand may not be
holding up quite as well as hoped and provides a slight cause for concern for market participants.
Chinese inflation data for Wednesday will be closely watched by the market. We expect to see ongoing signs
that prices globally are increasing at a steady clip and a surprise to the upside in this week’s data cannot be