US Dollar back on the map as Payrolls rise, Unemployment drop and Michigan jumps
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US Dollar back on the map as Payrolls rise, Unemployment drop and Michigan jumps

  • The US Dollar (Index) jumps over 0.50%, above 104  in the  aftermath of NFP numbers and Michigan Sentiment print.
  • Traders see Unemployment rate fall to 3.7%, below 3.9% estimate.
  • The US Dollar Index pops back up towards 104.

The US Dollar (USD) is brushing off the Japanese crisis it had on Thursday. At one given point the Japanese Yen was up 4% against the Greenback. The strong US Jobs Report print though, washes off that devaluation and puts the US Dollar back on the map with traders backtracking on earlier bets of quicker cuts from the US Federal Reserve. 

On the economic front, the Unemployment rate is taking up all the attention. A drop from 3.9% to 3.7% is a much telling sign on how strong and tight the labor market still is. The University Prelimenary numbers for December are providing an upbeat Consumer Sentiment, jumping to 69.4, beating 62 in the estimates. 

Daily digest: US unbeatable

  • The US Nonfarm Payrolls report mostly in line with some small positive upticks:
    1. Nonfarm payrolls number for November went from 150,000 to 199,000, above the 183,000 consensus.
    2. Monthly Average Hourly Earnings went higher, from 0.2% to 0.4%
    3. Yearly Average Hourly Earnings went a little lower, from 4.1% to 4%.
    4. The US Unemployment Rate for November contracted further from 3.9% to 3.7%
  • The University of Michigan has released its preliminary data findings for December:
    1. The Sentiment Index jumped 61.3 to 69.4, beating 62 estimate.
    2. The Inflation expectations went from 3.2% to 2.8%.
  • European and US equities are dispersed with European equities being near 1% up on the day. US equities are down with the Nasdaq leading the decline by 0.30%.
  • The CME Group’s FedWatch Tool shows that markets are pricing in a 97.7% chance that the Federal Reserve will keep interest rates unchanged at its meeting next week.  
  • The benchmark 10-year US Treasury Note jumps to 4.22% and erases earlier pressure on rate cuts. 

US Dollar Index technical analysis: King Dollar making its way back up

The US Dollar is stuck on a crucial crossroads that might trigger either substantially more and longer-term US Dollar appreciation or devaluation. In the runup towards Super Wednesday and Super Thursday when markets will hear from no less than four of the biggest central banks in the world, it looks like the Greenback might reestablish its label as King Dollar. Traders looking for clues would best keep an eye on the spread between the US 2-year yield and the German 2-year yield, which has been getting wider – a situation which is correlated with a stronger US Dollar. 

The DXY is bouncing back up again after the decline on Thursday where the Japanese Yen appreciation was just too much to bear. The DXY could still make it further up, should employment data trigger a spike in US yields again. A two-tiered move – first with NFP and then University of Michigan numbers – could move the DXY back above 104.28, with the 200-day and 100-day Simple Moving Averages (SMA) turned over to support levels. 

To the downside, the 200-day SMA has done a tremendous job in supporting the DXY with buyers coming in below 103.56 and pushing it back towards that same level near the US closing bell. If it fails this Friday, the lows of November near 102.46 is a level to watch. More downside pressure could bring into view the 100 marker, in a case where US yields sink below 4%.

Employment FAQs

How do employment levels affect currencies?

Labor market conditions are a key element to assess the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and thus economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels and thus monetary policy as low labor supply and high demand leads to higher wages.

Why is wage growth important?

The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.

How much do central banks care about employment?

The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given its significance as a gauge of the health of the economy and their direct relationship to inflation.