Despite experiencing a brief climb, the USD ultimately returned to its pre-NFP low levels. Why is the Greenback seemingly disregarding strong NFP figures and declining unemployment rates?

US NFP (Non Farm Payrolls) last week skyrocketed to 288,000 and unemployment rate fell to 6.3%, far above and beyond analysts expectation, as well as the previous month data. Traditionally, strong US NFP most likely will be followed by USD appreciation. However, although it briefly climbed, but it turned back to pre-NFP low levels. Why do Greenback ignores strong NFP and falling unemployment?

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Labor Participation Dropped, Wages Flat

US NFP compiled all of US workers outside government, houshold, nonprofit organizations, and farming employees. Overall, US NFP covers 80% workers who work to produce US GDP. The rise and fall of monthly US NFP is seen as an expression of US economic condition and become one of policy considerations. That is why US Bureau of Labor Statistics' NFP reports is awaited by financial market players.

Nevertheless, US NFP report is not only filled by NFP numbers. US NFP statistic is part of Employment Situation Summary that also houses other job market details, such as number of jobs per sector, working hours, average hourly earnings, etc.

The last US Employment Situation Summary was opened by sensational piece of news. Hurrah! NFP and unemployment back to the way they were before crisis in 2008. But the deeper we examine the report, the more we could see that it lacks some important pieces. 806,000 people dropped out of workforce in April, although there were an increase of 503,000 in March. Labor force participation too, slumped to 62,8%. Employment-population ratio doesn't show significant improvement. The number of involuntary part-time workers stayed the same. Worse off, average hourly earnings for for all employees on private NFP was unchanged.

In short, although US unemployment seemed solid, but there is actually little to zero improvement on the job market. At this point, we could say without any doubt that tapering does not hurt US economy. Still, the Fed will most likely check the next month's data to ensure that the job market and US economy could handle all the challenges ahead, including the possibility of Fed rate hike.

 

Tumbled US Benchmark Treasury Yields

Reuters yesterday (4/5) mentioned another factor that might have dropped the greenback further, that is the tumbled US Treasury yields, particularly the long-term ones. US Benchmark Treasury yields fell to three month low 2.57% from the previous 2.59%. Given that the fall happened after a particularly strong NFP, it signals bad times for the USD. If even a strong US NFP can not revive it, then what else? As David Rodriguez from DailyFX said, A market that doesn't rally on bullish data probably isn't bullish.

 

Janet Yellen Is, Basically, Dovish

When some times ago Fed Governor, Janet Yellen 'accidentally' mentioned the possibility of Fed rate hike in six months after tapering ends, she shifted market attention from tapering and US economy fundamentals (including NFP) to speculation of when Fed will hike interest rate. Consequently, the market observes employment report much more thoroughly and open their ears widely when there is Fed officials speaks.

This is why, despite of the many important US data will be released this week, at the center of the spotlight is Yellen testimonial on Wednesday.

The problem is, after four months in office, the market have started to know Yellen well. She is consistently followed up tapering schedules, but reluctant to provide clarity on the topic of rate hike by quoting unemployment. Kathy Lien from BK Asset Management predicted Yellen will most likely downplay the improvement by saying that tapering does not equal tightening. Furthermore, drop in labor participation and flat wage growth will give Fed an excuse not to tighten policy. On the contrary, it gives them reason to keep low rate.

Conclusively, USD fundamentals this week seems weak. As long as the Fed does not show hints to raise rates soon, there is little chance the USD will change direction. What's more, there are many big events in other currencies calendar, such as RBA, BoE, and ECB interest rate decision. This is, of course, excepting another surprise like when Yellen blurted out the 'six month' comment.

 

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