Is the US Dollar’s Recovery Sustainable?


Nonfarm payrolls. A worrying new trend?
Nonfarm payrolls. A worrying new trend? © forexop
After the FED decided not to raise interest rates on the 27th of April, the USD continued to depreciate sharply until reaching a bottom level on May 3, 2016. This level was also reached at the end of 2014. The Dollar Index went from $94.27 to $91.89 in 4 days. Since then, the USD has recovered slightly – hammer pattern (cf. chart) – back towards $94.30 before coming back down to $93.64.

Recent data is contradictory and shows a lower-than-expected and more fragile US growth.

USD Trend Reversal?

The question is – is this a sign of a reversal in trend, or a momentary retracement before continuing downward?

Figure 1: US dollar index - recent developments
Figure 1: US dollar index - recent developments © forexop

The Dollar Index was developed in the 70s to provide a relative measure of the USD against a basket of currencies – usually the currency of its major trading partners – the EUR, the YEN, the GBP, the CAD, the SEK and the CHF. When the Dollar Index increases, it means the USD strengthens against these currencies, and vice versa.

Thus, the evolution of the Dollar Index is heavily dependent on macroeconomic data reflecting the US economy and the pace at which the FED decides to tighten monetary policy. Indeed, the USD may appreciate further as rates increase since it means that the return on capital invested in the United States will be higher than in other countries: it is therefore a more attractive investment for investors.

Weaker Jobs Growth

Recent data is contradictory and shows a lower-than-expected and more fragile US growth. The latest example is the employment report of Friday 6th of May. The NFP headline – that is job creation – was worse-than-expected: the US created only 160,000 jobs in April, compared to the expected figure of 200,000 expected. This reading is the lowest since September 2015, but remains above the 100,000 that represents the minimum level considered by Janet Yellen to absorb new entrants into the labor market and prevent the unemployment rate from increasing.

Figure 2: Changes in US nonfarm payrolls data
Figure 2: Changes in US nonfarm payrolls data © forexop

Over the last 3 months, the average job creation reached 200,000 per month. Over the last 12 months, 232,000. Besides the low figure in April, the previous months’ figures were also revised downward: 233,000 from 245,000 in February and 208,000 from 215,000 in March.

On Thursday the 5th of May, the unemployment claims came out higher than expected at 274,000. This is published every week and are representing the number of people who filed a request for financial assistance because they do not have jobs. So, we have a larger number of people who filled in an allocation form (and more than the previous month), but this figure is still below the 300,000 threshold associated with healthy labor market conditions. Moreover, it has been 61 consecutive weeks that this number is below this threshold, the longest streak since 1973.

Figure 3: Weekly jobless claims - recent history
Figure 3: Weekly jobless claims - recent history © forexop

These statistics can trigger high volatility especially because indications of the next rate hike from the FED are sought by investors. The FED is very data-dependent regarding employment, inflation and consumption. The employment report of April shows an economy that is close to full employment, with an increase in numbers of hours worked, in wages and a stable unemployment rate at 5%, albeit with a decrease in job creation. In addition, job creation is now happening in sectors with high incomes such as financial services.

After this job report was released, the chance of a rise in June fell to 8% even though June is still a “live meeting” for a lot of FED members. The Dollar Index will therefore evolve according to the published information that will help determine whether the US economy is strong enough to evolve in a rate tightening environment even as other central banks undertake more quantitative easing.

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