US Dollar Tumbles Despite Strong Nonfarm Payrolls - What Happened?

The US dollar saw an expectedly volatile day of trade, as the morning Nonfarm Payrolls report forced significant price movements across all greenback pairs. The direction of such currency changes were significantly less predictable, however, as a strong rally on better-than-forecast NFP figures turned into a similarly sharp sell-off as the day wore on.

Positive Nonfarm Payrolls data sent the euro substantively lower against the dollar in mere seconds following the announcement, hitting fresh multi-week lows of $1.4032 through morning trade. A similarly sharp reversal actually left the European currency up on the day, however, trading at $1.4153 through time of writing. Price action was understandably similar across other dollar pairs, with the British Pound recouping an initial 90 point loss to add $.0055 at $2.0440. The Japanese Yen was the only major currency to decline against the greenback on a daily basis, with fresh record highs in key US stock indices sending the dollar ¥0.42 off of yesterday?s close to ¥116.84.
Employers unexpectedly added 110,000 jobs to their payrolls through the month of September, with results for August revised significantly higher to an 89,000 gain. The additions were not enough to stop the Unemployment Rate from rising to 4.7 percent, but the better-than-forecast Nonfarm Payrolls results were easily enough to assuage fears of a further hiring contraction through the medium term. Wage data was similarly upbeat; Average Hourly Earnings grew 0.4 percent in September. The net result of the release was to cut back expectations for further Federal Reserve interest rate cuts through year end.

Implied rates on Fed Funds Futures contracts instantly gained following the release, with markets pricing in a mere 50 percent chance of a further FOMC rate cut in October. Such expectations had previously priced in as much as an 80 percent chance through recent trade, and now speculators forecast that the Fed will only cut rates by 25 basis points through December. Given such a sharp shift in rate forecasts, the US dollar instantly stood to gain against major foreign currency counterparts.
The greenback later sold off on what was said to be sovereign diversification efforts, with large Euro/US dollar buy orders forcing sizable moves in relatively illiquid Friday trade. Authorities clearly pounced on the opportunity to sell dollars on a strong intraday rally, and such patterns have shown few signs of slowing through recent trade. Further speculation that key economies will sell more dollar holdings leave little scope for a short-term rebound. Indeed, there remain very few traders willing to load up on US dollar long positions in the face of an overwhelming downtrend.

Domestic equity markets instantly rallied following the Nonfarm Payrolls report and held near recent highs through afternoon price action. The S&P 500 Index set fresh intraday record highs on the session, up 0.8 percent to 1,555 at time of writing. The NASDAQ Composite index was the day?s largest gainer, however, at an impressive 1.4 percent improved to 2,772. Shares on the Dow Jones Industrial Average were not quite as fortunate, but the key index nonetheless added 0.7 percent to 14,068.
US Treasury Bonds showed substantial losses following labor data, with yields seeing double-digit increases through end-of-week trade. The key 2-Year Note yield jumped 10 basis points to 4.08 percent, while the longer-dated 10-Year surged 13bp higher to 4.64 percent.

Written by David Rodriguez, Currency Analyst for