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Dollar Falls on Collapse in New Jobs Creation

US dollar turns weaker as labor market tightens

unemployment-rising


The US dollar which previously posted gains for the past three weeks turned weaker as the May jobs report showed that only 39,000 new jobs were created. This is worst job creation report since 2010. The ICE futures dollar index closed at a two week low on Friday as questions linger on the Fed's plans for a summer rate hike.

Weekly Review


The markets opened last week to a new trading with the monthly PMI numbers coming out. Manufacturing was still mixed with China's Caixin showing a contraction, but the UK Markit PMI managed to bounce back above the 50-level in May after previously slipping into contraction in April. In the US, the ISM's manufacturing gauge showed a strong print in May, rising to 51.3 and beating expectations of 50.5.

The main focus was however, the US monthly jobs report. Safe haven trades gathered steam with the Yen surging again for the most part. BoJ official, Sato last week spoke against the BoJ’s monetary policies, saying that negative rates were in fact having a tightening effect and suggested that the central bank look at tapering its stimulus purchases. The yen extended its gains on the comments and also the fact that Japan’s Prime Minister Shinzo Abe officially announced postponing the sales tax to October 2019.

On Thursday, the ADP private payrolls showed that the US businesses added 173k jobs in May, slight below consensus estimates but better than April's revised print of 166k. The monthly non-farm payrolls data released on Friday showed that the US economy added a dismal 38k jobs for the month of May. Previous month's data was also revised lower to 123k in April and 186k in March, or about 59k subtraction in total. The US unemployment rate fell to 4.70% but the participation rate dropped as well.

Last week saw the bi-annual OPEC meeting in Vienna. There was no decision made to cut or even freeze oil production leaving it to the markets to rebalance the pricing. The OPEC pointed out that Oil prices gained by nearly 80% since its last meeting in December and said that the market rebalancing was also taking shape as seen by declining crude oil stockpiles. WTI Crude Oil ended the week at $48.84 a barrel.

The ECB's policy meeting was largely a non-event with the euro staying muted, but was weaker on the whole. Policy rates were left unchanged and the ECB announced that it would begin its TLTRO-II and Corporate bond purchases this month. Inflation and GDP forecasts were lifted modestly higher.

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The Week Ahead


For the week ahead, the RBA and the RBNZ's monetary policy meetings will be in focus. The Reserve Bank of Australia is expected to hold interest rate unchanged at 1.75% after just cutting rates a month before. Also, with last week's Australian GDP beating estimates, the RBA is likely to stand aside and watch for more economic data. However, with inflation still a concern and the GDP report showing that wages remained flat, the RBA could come out dovish, leaving more rate cut options on the table.

The Reserve Bank of New Zealand will be meeting during the week and the monetary policy decision is expected to be a close call. Inflation expectations have turned higher and with oil price posting a significant increase, the downside risks to inflation looks to be abating for now. That said, the RBNZ's decision will be a close call and even if no rate cuts are delivered this week, markets maintain the view that the RBNZ could cut rates in August.

Fed Governor Janet Yellen is expected to speak in Philadelphia and that markets will be acutely tuned into her comments, following Friday's dismal jobs report. In her previous speech just two weeks ago, Janet Yellen said that a rate hike was appropriate over the next few months. Investors will be looking at whether Ms. Yellen would change her views in light of the May jobs report.

From China, consumer and producer price index data will also be coming out. Expectations are that inflation increased at a slower pace, rising 2.20% in May, down from 2.30% in April, while PPI is expected to improve, expected to fall only 3.30% on the month. China's import/export data will also be looked at, which is expected to show a rebound in exports and a moderation in the decline in imports.

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