Dollar Unfazed By Weak Payrolls – Here’s Why

One of the most important pieces of data this week was November non-farm payrolls. The softer release should have sent the dollar tumbling lower but instead, the greenback ended the day sharply higher against most of the major currencies. This same strength can be seen in stocks, which soared to record highs.

So why are investors buying the dollar and stocks on a lackluster jobs report? The answer is simple.

 

10 and one 10 us dollar bill

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Everyone knows that this latest pandemic wave hit the US economy hard but with local governments crafting plans for vaccine distribution and Congress working towards a new stimulus deal before the end of the year, investors see pent-up demand as 2021’s primary source of recovery. Even Federal Reserve officials agree that while the surge in virus cases makes the outlook “extraordinarily uncertain” according to Powell, vaccine development makes him “very positive” for the medium term. The pandemic is deepening but the record-breaking moves in stocks tell us that investors are unambiguously optimistic.

With that said, US companies added only 245K jobs in the last month, down from 610K in November. This was significantly less than the 468K consensus forecast but the improvement in the unemployment rate and increase in average hourly earnings were bright spots. New restrictions should have caused more job losses and fewer additions in late November / December but how the market reacts to revisions or next month’s report depends on where we are at with vaccine development and distribution.

In the near term, unless there are serious setbacks, investors continue to shrug off weaker data. Next week the focus shifts away from the US dollar to the euro. With only CPI and the University of Michigan index on the calendar, the European Central Bank monetary policy announcement will dominate. The ECB is widely expected to ease monetary policy and lower economic projections. However, instead of falling in anticipation, the euro climbed to its strongest level in 2.5 years this week. Europe is a few weeks ahead of the US in its coronavirus battle with some countries like France and Spain starting to see their curves flatten. By easing in December, these improvements could give the ECB the peace of mind to see if the region recovers before considering more stimulus. In other words, there could be more US stimulus before another round of Eurozone stimulus in 2021.

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