Based on the latest jobs report, the US economy is doing great. Approximately 4.8 million Americans returned to work in the month of June following an increase of nearly 2.7 million in May. The unemployment rate dropped to 11.1% from 13.3% and these improvements drove the dollar and stocks higher. Unfortunately, the greenback was unable to sustain its gains as USD/JPY and EUR/USD traded back to pre-NFP levels.

After the Bureau of Labor Statistics admission last month that misclassifications understated the unemployment rate, investors braced for major downward revisions to last month’s report. Yet that did not happen and instead non-farm payrolls were revised higher for May, with more Americans returning to work than previously estimated. If US virus cases did not hit a new high yesterday above 50,000 this would be great news for the US economy. Unfortunately, the outlook is uncertain and the larger drop in hourly earnings combined with lower weekly hours is a sign of its ongoing vulnerability.

So while the gains in the equity market signal optimism, dark clouds loom over the strong labor market report, muddling the outlook for currencies. The COVID-19 outbreak in the US will be the primary driver of market flows. The number of new cases along with the deaths and the accompanying government responses will determine if these gains are sustainable. If lockdown measures are tightened, leading to another retrenchment in economic activity, USD/CHF and other high beta currencies will fall. Then it will be up to the Federal Reserve and Congress to support the economy. Throughout the COVID-19 crisis, the primary support for the markets has been liquidity. The extra unemployment benefit runs out at the end of the month and if its extended, it is a short term band-aid for the economy that will drive EUR/USD, NZD/USD and all other risk currencies higher even as virus cases rise.

Trading on Friday should be quiet with US markets closed in observance of the July 4th holiday. Revisions to Eurozone and UK PMIs are scheduled for release but we do not expect any big moves. Euro held onto its gains on Thursday despite better NFP and Eurozone mixed data. Producer prices fell more than expected in May while the unemployment rate ticked up to 7.4% from 7.3%. Sterling also marched higher but the best performing currency was the New Zealand dollar which likely benefitted from AUD/NZD selling after fresh lockdown measures were implemented in Melbourne suburbs. Australian data continues to improve with the trade surplus rising and tonight’s retail sales report likely to show recovery in demand. Stronger trade data and higher oil prices sparked gains in the Canadian dollar.