U.S. Dollar Soars Ahead Of Payrolls, But Can Rally Last?

The U.S. dollar traded sharply higher against all of the major currencies on Thursday, with USD/JPY closing above 110 for the first time since April – a sign that investors are positioning for a strong report. Last months jobs number was abysmal, with U.S. companies adding only 266,000 new workers. Economists are looking for job growth to more than double in May, but the problem is that other U.S. indicators favor a softer report.

Although weekly jobless claims fell below 400,000 for the first time since the pandemic began and ADP reported a very strong increase in private payrolls, continuing claims ticked up and the acceleration in service sector activity was not accompanied by stronger job growth. Instead, the employment component of non-manufacturing ISM dropped to 55.3 from 58.8. Challenger reported more layoffs, while consumer confidence declined, according to both the Conference Board and University of Michigan reports.

Arguments in Favor of Stronger Non-Farm Payrolls

1. ADP Employment Change rises 978,000, up from 654,000

2. 4-Week Average Jobless Claims drops to 428,000 from 562,000

Arguments in Favor of Weaker Non-Farm Payrolls

1. Employment Component of ISM Services declines

2. Employment Component of ISM Manufacturing declines

3. University of Michigan Consumer Sentiment Index declines

4. Conference Board Consumer Confidence Index declines

5. Challenger Reports rise in Job Cuts in May

6. Continuing Claims rise to 3.77 million from 3.68 million

Yet, the greenback ignored these disappointments and held onto its gains because investors believe that these softer releases were baked into Aprils numbers. A large subset of traders are looking for the difference to be made up in May, with a whisper number of more than 1 million jobs. The ISM non-manufacturing index hit a record high, a sign that service sector activity is very strong. The recovery continues to be fuelled by pent up demand and it should only be a matter of time before the jobs report reflects that. Right now some businesses are struggling to find workers because wage growth is slow, but eventually businesses that need employees to meet rising demand will need to pay more. Nearly half of U.S. states are planning to cut off enhanced federal jobless benefits as soon as next week, which should draw workers back to the workforce.

With a whisper number as high as 1 million, a very strong NFP report is necessary for the U.S. dollar to extend higher and stocks to avoid another down turn. Equities are consolidating and two back-to-back months of subpar job growth could be too much for the market to handle as it would cast doubt on the overall recovery. Economists are looking for non-farm payrolls to rise by 650,000 and the unemployment rate to drop from 6.1% to 5.9%. Wage growth, however, is expected to slow from 0.7% to 0.2%.

For the U.S. dollar to extend its gains, we need every component of the jobs report to beat because aside from the jobless rate, the forecasts are low. There could also be a very sharp upward revision to April‘s numbers, which would compound the rally in the greenback. However, if any part of the report falls short and isn’t offset by upward revisions, the market could turn risk off quickly.

Canadian labor market numbers are also on the docket. With a stay-at-home order in place for much of Canada, no significant pickup in job growth is expected. Economists are actually calling for another month of job losses. If U.S. data beats and Canada sheds job, today‘s rally could mark a bottom for USD/CAD. The Australian and New Zealand dollars dropped the most on risk aversion, while the euro and sterling’s slides were moderated by upward revisions to PMIs.