What the March NFP Means for the US Dollar

April 7, 2014

San Francisco (Apr 8 )  Newsflash! The March non-farm payrolls report broke the hearts of several dollar bulls by printing a weaker than expected reading of 192K, short of the estimated 200K increase in hiring. Instead of improving to 6.6%, the unemployment rate didn’t budge from its previous 6.7% reading, suggesting that there wasn’t much of a rebound in the labor market.

On a brighter note, the February figure was revised higher from 175K figure initially reported to 197K. In addition, the total number of private sector jobs surpassed the pre-recession peak of 116 million jobs recorded in January 2008.

A closer look at the NFP components shows that the participation rate improved from 63% in February to 63.2% in March as 503K individuals entered the labor force in search of full-time work. Extremely cold weather conditions no longer weighed on employment, as the construction sector boosted hiring by 19K and retailers added 21.3K jobs. However, average hourly earnings stayed flat during the month instead of posting the estimated 0.2% uptick.

All in all, was it a good report or a bad one? Well, it appears that the markets had a mixed reaction to the NFP! The S&P 500 indicated that the latest jobs report sparked risk-taking, as the equity index jumped to a historic high around the 1900 level right after the release then ended the day with a 1.3% loss. Even forex pairs were all over the place as the Greenback sold off to most of its major counterparts, except for the euro and the pound.

Remember that Fed Chairperson Janet Yellen recently emphasized the importance of a jobs market recovery in terms of determining the Fed’s monetary policy bias. In the latest FOMC statement, she said that labor indicators other than the unemployment rate should also be considered when it comes to evaluating whether the jobs sector improved or not.

Perhaps this is precisely the reason for Friday’s crazy price action! Everybody was looking at everything all at once, not entirely sure which figures matter to the Fed and which ones don’t. And with a bit of confirmation bias in play, dollar bulls probably focused on the indicators that supported the ongoing taper and a potential Fed rate hike six months after the end of QE. On the other hand, doves may have zoned in on the unchanged unemployment rate or the fact that wage growth was non-existent.

As some Wall Street analysts pointed out, this may be exactly what the Fed wanted to happen all along. The previous FOMC monetary policy statement revealed that Yellen isn’t really the number one fan of forward guidance when it comes to managing market expectations. The upcoming release of the FOMC meeting minutes should provide more clues on what to expect for future monetary policy.

As for the U.S. dollar, its Friday rallies against the euro and the pound seem underwhelming and may have simply been a result of economic weakness among European nations. The selloff against higher-yielding commodity currencies may have been spurred partly by risk appetite, as traders anticipate continued stimulus from the Fed in light of the latest jobs disappointment.

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