Did The Creation Of More Than Half A Million Jobs Snuff Out The Dollar's Upside Correction?

The second consecutive disappointing US jobs report stopped the dollar bounce cold. The question is whether that means that the greenback's downtrend, as seen in April and May, will resume. On the one hand, our macro narrative requires higher US interest rates in absolute and relative terms to take pressure off the dollar.

On the other hand, the US still created over half a million jobs, more than twice the pace seen in April. The April disappointment did not deter Fed officials from acknowledging that it may be appropriate to begin talking about adjusting the pace of its bond purchases in the upcoming meetings. Other labor market indicators, including initial weekly jobless claims, show that the labor market is healing, albeit not as fast as economists in general expect. 

As we sketch out below, the momentum indicators of the dollar had become stretched, as one would expect given the persistence of the greenback's decline since the end of March. Nevertheless, they seem to favor a continued upside correction for the dollar.

Next week's macro backdrop includes another jump in the US CPI and what is expected to be a dovish ECB (a majority in a recent Bloomberg poll expect the acceleration of bond buying to be extended until September). Also, a push back by the Bank of Canada against the three rate hikes the market has discounted over the next two years is possible after the second consecutive monthly loss of jobs.

Dollar Index

The peak before the jobs data was a little shy of the (61.8%) retracement of May's decline, and the sell-off after the disappointment took it to nearly the (61.8%) retracement of bounce from the June 1 low near 90.00. Below there is support in the 89.65-89-75 area.

The MACD has turned up and is near its best level since early May. The Slow Stochastic is recovering from its late May dip that held above April's low, even though the index did not. The five-day moving average is poised to rise above the 20-day for the first time in two months. 

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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