Dollar Weakness Limited as Incoming Data Suggests Strong Payrolls

US Dollar – The service sector ISM index dropped to a four year low in the month of March while factory orders grew by a weaker than expected 1 percent in the month of February. These reports indicate that the US economy is not out of the woods, but at the same time, these disappointments were not enough to trigger a major reversal in the US dollar. Instead, the sharp drop in layoffs reported by Challenger Gray and Christmas and the rise in employment reported by payroll agency ADP has everyone focusing their attention on Friday’s non-farm payrolls release. According to Challenger, layoffs fell by 24.6 percent in the month of March. The last time layoffs dropped by this much was in November, December of 2006 and January of 2007. In those 3 months, on average, we saw monthly job growth of 189k. We already have a NFP Preview up on DailyFX and encourage you read more about what we expect. The four week moving average of jobless claims for the month of March was 315k, compared to 338k in February. The last time the average in claims were this lean was back in December 2006 and January 2007, when US companies added 226k and 146k jobs to their payrolls respectively. The improvement from February to March also tells us that at bare minimum, job growth in March should be stronger than the previous month. Frigid temperatures in February caused many construction sector projects to be halted. The temperate weather in March should have encouraged the resumption of many of these projects. A deeper look at the ISM number reveals a sharp rise in prices paid, validating the Federal Reserve’s concerns about inflation. The rise in inflation was primarily driven by the rebound in oil prices, but this could end now that prices are beginning to fall as geopolitical tensions subside. This morning, Iran released the 15 British naval personnel that they captured. With another war in the Middle East averted, the release has extended the drop in crude prices. Looking ahead, the US economic calendar continues to be very light with only jobless claims and the Employment Index on the calendar. This should keep the price action in the currencies reflective of the market’s expectations for payrolls.

Euro – The Euro managed to erase all of yesterday’s losses thanks to combination of stronger Eurozone data and weaker US data. In contrast to the service sector in the US, the service sector in the Eurozone actually saw faster growth in the month of March. Accelerated activity in France and Germany offset a mild decrease in Italian service sector activity. Germany also reported a sharp rise in factory orders due to some unusual demand for big ticket items. The only disappointment was in Eurozone retail sales, which fell victim to weaker spending. Overall, the impact of the Value Added Tax on Germany and the Eurozone as a whole continues to be limited. This keeps a rate hike by the European Central Bank in play as ECB members continue to remain hawkish. Garganas suggested this morning that the central bank could raise its growth forecast while Liebscher warned that price risks are absolutely to the upside. German industrial production is the only Eurozone release expected tomorrow. The stronger factory orders number could drive a better than expected IP number tomorrow. Meanwhile, the release of the UK naval crew has sent the Swiss franc tumbling against the Euro. EUR/CHF is now trading at a fresh 7 year high.

British Pound – Interestingly enough, we did not see much strength in the British pound today despite the release of the UK naval crew. This may be due to the fact that most traders do not expect the Bank of England to raise interest rates tomorrow despite continual upside surprises in UK data. Consumer confidence hit a 4 month high while the service sector activity index accelerated from 57.4 to 57.6. The economy may be improving, but it has not improved enough to convince the majority of the monetary policy committee members to vote in favor of higher rates. When rates are left unchanged, the central bank does not release a statement. We do however expect the balance of votes to shift in favor of a rate hike. The last minutes released from the March meeting revealed an 8-1 voting record with the 1 dissenter favoring a rate cut. The minutes from tomorrow’s meeting will be released on April 18th.

Japanese Yen – The performance of the Japanese Yen was mixed today with the currency rising against the US dollar and British pound but falling against the Australian and New Zealand dollars. There was no data released last night. In his speech at an economic seminar, Bank of Japan Deputy Governor Muto said nothing new about the central bank’s monetary policy. He indicated that rates will be adjusted as the economy expands but will remain very low for some time. Leading indicators is the only piece of noteworthy data expected tonight. Economic growth has been lackluster since the beginning of the year and we expect the report to reflect that.

Commodity Dollars (AUD, NZD, CAD) – The big activity today was in the commodity currencies. The Australian dollar hit a fresh 10 year high, dragging the New Zealand dollar up with it. This represents a very strong recovery after the Reserve Bank of Australia’s decision to leave interest rates unchanged took the AUD/USD down to a low of .8065. The out performance of the Australian dollar is primarily due to the sharp rise in gold prices, which hit a 5 week high. The Canadian dollar ended the day unchanged but a closer look at the currency’s activity reveals a sharp intraday reversal as well. Unsurprisingly, oil prices are down after the release of the UK soldiers. The Canadian dollar should be the main currency in play tomorrow since Canada is the only country releasing meaningful data; namely employment and IVEY PMI. Jobs and manufacturing sector activity are both forecasted to increase but the pace of job growth is expected to slow. Recent strength in the Canadian dollar should also begin to weigh on the manufacturing sector, raising the risk for a softer IVEY PMI number.