US jobs growth of only 20,000 in February, versus expected growth of 180,000, has allowed rest-of-the-world currencies to claw back ground against the US dollar which, until Friday, had been on a stellar run.
Data from the Bureau of Labor Statistics showing US jobs growth of only 20,000 in February, against expectations for 180,000, lifted the Australian dollar from a 9-week low on Friday.
On Friday morning, the Aussie had scraped the US70¢ handle but managed to end the week at US70.4¢.
Australia’s currency has been on the defensive for much of the past month, ever since the country’s central bank slashed growth and inflation forecasts and signalled that lower interest rates were possible, and it was jarred further midweek by data showing Australia sliding into a per-capita recession for the first time since 2006.
Both HSBC and JP Morgan predict that the Aussie ends the year at sub-US70¢ levels, with forecasts of US66¢ and US68¢ respectively.
Like the Australian dollar, the euro was in need of a boost last week, having slumped on Thursday to its lowest level since the summer of 2017, at US$1.118. Euro weakness followed the latest meeting of the ECB, at which the central bank said it would not raise interest rates until 2020 as part of an effort to lift the eurozone economy out of this “period of continued weakness and pervasive uncertainty.”
In a psychological boost, the euro ended the week back above US$1.12 (US$1.1232), driven of course by Friday’s disappointments on the dollar side.
For the euro, analysts at French investment bank Société Générale remain faithful to the US$1.12-1.16 range which had, prior to Friday, contained the currency since October. As such, SocGen now advocates “tactical euro longs” (is betting on short-term euro appreciation).
“EUR/USD should remain a prisoner of its 1.12-1.16 range but is currently trading near the lower boundary … and tactical longs appeal if the 1.12 support holds, as the market could unwind some of its accumulated shorts,” SocGen wrote.
For the US dollar itself, a near-perfect performance in March was unlikely to be maintained. The world’s reserve currency had, before Friday, gained value in 6 of the preceding 7 trading days, per the US Dollar Index, and had come within a whisker of making a 20-month high. After a post-payrolls slip, a new high is now 0.36 index points, or 0.4 percent, away.
Though Friday’s headline jobs number “provides a reality check that a long-forecast [US] slowdown is arriving,” according to Bloomberg’s Katia Dmitrieva, it is something that ING’s James Knightley argues should be considered “too bad to be true.”
Knightley believes currency traders should focus more on US wage growth which, at 3.4 percent year on year, is at its highest in a decade, and on the falling US unemployment rate, now only 3.8 percent—nearly a 50-year low.
“We still think there is a strong case for another [Fed] interest rate rise this summer,” Knightley says.
Knightley’s ING colleague, Petr Krpata, continues to expect the US dollar “to outperform the low-yielding G10 currencies in the coming months.”
The only G10 currency with less friends than the US dollar on Friday was the British pound, which suffered its worst week since October.
Sterling bulls have folded ahead of Tuesday’s meaningful vote on Theresa May’s proposed EU withdrawal agreement. The pound now fetches only US$1.301—that’s 3.5 cents less than it bought on February 27th.
May warned last week of a “moment of crisis” if MPs reject her Brexit deal for a second time, which looks highly likely given the absence of legal assurances from the EU on the temporary nature of the backstop.
Should May’s deal be rejected, MPs will be given votes on whether to leave the EU without a deal or seek to delay the Brexit date, now only 20 days away.
Experts are reluctant to make sterling forecasts given the obvious uncertainties, though HSBC did say a month ago that it foresees GBP/USD in and around US$1.45 if a deal is struck, at levels near US$1.10 in the event of no-deal, and at US$1.55 if there is no Brexit at all.