Currencies Soar As US, Canada Labor Data Beat – Implications For Fed Next Week

Currencies and equities traded sharply higher on Friday, June 5, following shockingly strong US and Canadian labor market numbers. Instead of losing another 7.5 million jobs in the month of May, US companies added 2.5 million jobs. No one, not even any of the 78 economists surveyed by Bloomberg, were looking for job growth last month, so Friday's report completely defied expectations.

It reinforces the view that a recovery is underway and suggests that the US government’s stimulus program effectively stabilized the economy. The CARES act provided forgivable loans if businesses rehire, and that’s exactly what we saw in Friday's numbers. Half of the increase was in food services and restaurants who rushed to reopen ahead of the Memorial Day holiday. The unemployment rate dropped to 13.3% from 14.7%, instead of rising to 19% like economists anticipated. The only bad news was wage growth, as earnings fell -1%, marking the first decline ever for the series.

Is the labor market recovery sustainable? Quite possibly, because the first half of May marked only the beginning of state re-openings. As more states ease restrictions, hiring will resume, especially ahead of the June 30th deadline to rehire employees and qualify for loan forgiveness.

USD/JPY shot higher in response, but the strong rally in stocks boosted high beta currencies, such as sterling and the Australian dollar, to avoid steep losses. EUR/USD pulled back after its eight-day long rally, but still managed to hover near 1.1300.

This report will go a long way in ensuring a brighter outlook from the Federal Reserve next week. The Fed is widely expected to leave monetary policy unchanged, and their resistance to negative interest rates will be validated by Friday's report. Manufacturing and service sector activity also improved, which should lead to a brighter outlook. If next week’s rate decision is laced with optimism, we could see renewed gains for the US dollar.

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