Commodity Currencies, US Dollar Tumble on Weak Jobs Report

DailyFX   |  May 4 2012 10:55 EDT

Another weak jobs print has raised questions regarding the US recovery, dampening an already diminishing global growth picture. With US Treasury yields falling, the US Dollar has traded lower against the Euro and the Japanese Yen, while the commodity currencies have been slammed by the report.

Fundamental Headlines

- Employers in U.S. Added Fewer Jobs than Forecast in April – Bloomberg

- European Manufacturing, Services Output Shrank Last Month – Bloomberg

- U.S. April Hiring Slows, Jobless Rate Falls to 8.1 Percent – Reuters

- Europe’s Bank Stands Pat – WSJ

- Nasdaq to Launch New Stock-Options Trading Venue – WSJ

European Session Summary

Market conditions were relatively quiet ahead of the hallowed nonfarm payrolls report, the United States’ reading of the labor market. Nevertheless, higher yielding and risk-correlated assets generally traded lower in the overnight sessions, with the US Dollar among the top performers midway through the European session.

However, the nonfarm payrolls report threw another wrench in the US Dollar’s rally. The 115K print versus the 160K forecast brings about the second consecutive month of disappointment, setting up the Japanese Yen for another push higher. The April reading was relatively less disappointing, showing jobs growth slowed by 4.2 percent from March to April; the March reading showed that jobs growth slowed by 53.7 percent from February to March. Generally speaking, it’s of my belief that this is the continued kickback from the unseasonably warm winter experienced across much of the United States this year, and that jobs growth should return to the 160K to 200K range the next few months ahead of the November elections.

In what has been little discussed in the wake of the report has been the dip in the unemployment rate, which fell to 8.1 percent in April from 8.2 percent in March. Clearly, this has nothing to do with the NFP print, but rather, the dip in the participation rate. The United States’ labor force participation rate fell to its lowest level since 1981 at 64.3 percent. This is starting to pose an enormous structural problem for the country that’s supposed to be the global growth engine. If more Americans are out of the work force, aggregate disposable income in the economy will be lower; considering consumption accounts for approximately 70 percent of the headline GDP figure, and a drop in disposable income will hurt growth. Put another way: if this trend continues, the Federal Reserve will have all the evidence they need for another round of quantitative easing.

Taking a look at credit, it’s clear that the poor labor market reading has stoked a major shift to safety, especially in the form of German Bunds and US Treasuries. The German 10-year Bund yield dropped to 1.584 percent today, while the US 10-year Treasury Note yield fell to 1.886 percent. On the shorter-end in Europe, there’s been an improvement in the Italy, French and Portuguese 2-year notes, while the Irish and Spanish 2-year notes saw their yields climb, with the former’s hitting a fresh three-month high (in terms of yield, three-month low in terms of price.

USDJPY 5-min Chart: May 4, 2012

Charts Created using Marketscope – Prepared by Christopher Vecchio

The Japanese Yen has been the top performer thus far on Friday, with the USDJPY depreciating by 0.40 percent. The commodity currencies have been weaker overall as well, with the Australian, Canadian, and New Zealand Dollars shedding 0.70 percent, 0.45 percent, and 0.61 percent, respectively, against the US Dollar. The EURUSD was little changed on the day, up 0.04 percent after NFPs.

24-Hour Price Action

Key Levels: 13:30 GMT

Thus far, on Friday, the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) is trading higher, at 9909.80 at the time this report was written, after opening at 9902.60. The index has traded mostly higher, with the high at 9920.97 and the low at 9896.55.

--- Written by Christopher Vecchio, Currency Analyst

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