There were always going to be divergences coming into today’s labour market data releases from the US and Canada. While the US economy continues to chug along with its recovery in May, most of Canada’s population remains under tighter lockdown conditions.
However, with this known to markets, the stark divergence in the data releases shouldn’t have prompted much of a reaction in USDCAD. However, after the data print, the currency pair dropped over a tenth of a percentage to reverse gains on the day. This is largely because of yesterday’s price action in markets and the higher expectations attached to the US economic recovery in response to the performance of the latest data.
In this light, the miss in the net employment figures in the US far outweighed the larger-than-expected contraction in Canadian employment, resulting in not only a decline in USDCAD but also broad-based USD selling.
Broad dollar DXY index remains volatile as Nonfarm Payrolls data underperforms expectations set by Thursday’s positive data releases
Thursday’s session meant that today’s release of May’s Nonfarm Payrolls data was going to be judged against even higher expectations than the median forecast suggested. While wages grew 0.5% month-on-month at a time when the unemployment rate remains elevated, FX markets focused on the underwhelming change in net payrolls.
The US economy added only 559,000 jobs in May, up from 278,000 in April, but the overall figure underwhelmed given yesterday’s ADP data highlighted nearly a million jobs were added in the private sector during the same time frame.
Even relative to economists expectations, which were arguably more tamed at just 675,000, the jobs number underwhelmed. This resulted in broad-based USD selling, with the greenback’s greatest losses concentrated in currency pairs where it fielded the largest gains yesterday (AUD, NZD, SEK). For the Federal Reserve, this eases the pressure to start in-depth discussions on the tapering of QE at the June 16th meeting, although we expect the topic to be discussed but at a less formal level. Additionally, today’s jobs data does little to change our underlying call on the US dollar, but highlights that our expectation of a mild depreciation in the broad dollar going forward won’t be a smooth path as the data in Developed Market economies continues to print in a volatile manner.
In Canada, the labour market shed some 68,000 jobs in May as lockdown conditions remained tight across most provinces, while wage growth naturally printed in negative territory given the labour market developments.
The overall labour market report isn’t as negative as it seems, however, as job losses remained concentrated to part-time employees and sectors sensitive to tighter lockdown conditions (retail trade -29,000, other services -24,000).
This suggests that the subsequent opening of the Canadian economy will see the labour market respond in a more elastic manner, with improvements in economic conditions expected from the end of Q2 onwards. The emphasis then will be on whether the data can live up to the Bank of Canada’s optimistic projections, especially after Q1’s disappointing GDP data. Additionally, today’s data release confirms our view that next week’s Bank of Canada meeting will provide no fresh guidance for markets after their previous decision to taper QE.
Author: Simon Harvey, Senior FX Market Analyst