Jobs Dispel Dollar Doubters
Last week we titled our report “Dollar Tarred by Tariffs But Will NFP Be Its Savior?” and as this week came to a close the jobs report came to the rescues of dollar longs. The Non-Farm payrolls report printed much stronger than expected at 180K vs. 130K forecast while unemployment rate dropped to 4.4% the lowest since October of 2006. The market instantly sent the EURUSD down by 50 points as fears of a US recession that have been hovering in the air for most of the week quickly dissipated. As we wrote on Friday, “The dollar bearish argument rests on the assumption that US will fall into a recession as its citizens begin to default on the massive amount of housing debt accumulated over the past decade. However, if the US economy continues to create jobs along with wage growth, the additional income should be able to service these mortgage debts averting a credit crunch… The key to the health of the US economy as well as the strength of the dollar is whether US growth can outrun its mounting debt obligations.”

For the time being the jobs number demonstrated that US growth remains remarkably resilient and should dispel any notion of doomsday scenarios floated by dollar bears. However, other US data this week did show a material slowdown with both ISM Services and Manufacturing decelerating markedly. Next week, the economic calendar is extremely quiet with only the Trade Balance and PPI data in queue. Trading may continue to range as neither the bulls not the bears appear to have the upper hand. One factor remains relatively certain – the Fed will not be cutting rates anytime soon. As such US long term yields rose on Friday and of they continue to do so next week, their price action may help the dollar regain more ground.

Euro Industry Remains Strong
Manufacturing data from the Eurozone remained surprisingly strong this week with German Industrial Production and Factory orders both beating forecasts by a wide margin. Demand from China for the high end industrial products fueled the growth in the region which should translate into a further job gains. The news bodes well for another rate hike by the ECB in May, as the central banks restrictive monetary policy has clearly not hurt growth in the region, providing the monetary authorities with greater political leeway to tighten further.

Next week however, the ECB is likely to stay pat as it keeps rates at 3.75% level. The ECB central bankers have been communicating a consistently hawkish message to the market but have not offered any hints of a possible rate hike in April. The ECB is a highly conservative bank that likes to prepare markets for its policy decisions well in advance. Therefore chances are miniscule that it would decide to shock the market with an unexpected rate hike.

With little fresh news on the monetary front, the euro is unlikely to react much to its own set of economic data. Most of the reports such as the Current Account or the final GDP reading are of only minor interest to the market offering little new insight into the future growth of the region. Next week, therefore may be marked by listless, range bound trading as neither the US nor the EZ carry much event risk on the calendar. Nevertheless, if events in other markets such as oil or equities intervene they could have their impact felt on currencies and volatility will quickly come back.

Yen -- Back to the Same Old Carry
Perhaps the strongest implication to Friday’s better than expected NFP report from US is that the carry trade will stay in play and as result yen will continue to be sold. Japanese data last week offered no reason for the BOJ to tighten rates until well after the June Japanese parliamentary elections leaving the unit vulnerable to yield hunters. On the economic front, the Tankan Manufactures survey missed estimates printing at 23 vs. 24 expected, but the service sector suggested some underlying strength as it beat forecasts with a reading of 23 vs. 22 projected. The Japanese economic growth may be starting to rotate away from producers to consumers as demand for services finally picks up pace. As we suggested last week, the better than expected results in Overall Household Spending may have been the first sign that the Japanese recovery, which up to this point has primarily benefited businesses, is broadening out to consumers.

The true test of that thesis will come next week when the Eco Watchers survey will print on Monday night. The man in the street survey rose sharply last month but is still below the 50 boom/bust level. Higher oil prices may have put a damper on consumer sentiment but if the index manages to break out into an expansionary mode, it will signal that the Japanese economy may be soon ready for a sustained round of rate hikes that should normalize monetary policy in the G-3 universe. For the immediate future however, the yen sees little support from the economic data and will only strengthen on any bouts of risk aversion.

Disappointing Industrial Production Figures Lessen Likelihood of Hike
The Pound traded within a 150 point range throughout the week, finishing slightly lower against its US counterpart on the heels of a strong employment report. Traders initially bid the Sterling higher on speculation that the Bank of England would raise rates through its Thursday meeting, but disappointing Industrial Production figures virtually halved expectations of a rate move. Looking at intraday futures price action, the odds of a BoE hike stood at approximately 45 percent before a sizeable drop in Manufacturing Production left futures at a 25 percent probability. The decline in manufacturing production figures was in clear contrast to earlier Services Sector figures, with upward surprises in Services PMI reportedly increasing pressure on the Monetary Policy Committee to act. Given that the MPC does not release statements on unchanged interest rate announcements, traders will now wait until April 18th for the Minutes from its most recent policy-setting meeting. A relatively empty UK economic calendar leaves little to guide rate expectations, with GBP pairs vulnerable to moves in other major world currencies.

Event risk will be limited to second-tier BRC Retail Sales and RICS Home Price Balance Reports; a late-week Trade Balance number unlikely to cause significant price moves for the Sterling. Given the recent attention to the domestic housing market the RICS survey may shed some light on the subject especially after declining for the past two months. Signs of slowing in domestic mortgage approvals leave risks to the downside for the headline price figures, and analysts predict that the report will indeed show a decline in home value gains. Otherwise, markets will watch for surprises in earlier BRC March Retail Sales Monitor results. Disappointments in official government figures have raised doubts on the health of consumer spending. As such, watch for any surprises in more recent BRC numbers and reactions in the GBP.

Labor Market Could Underpin a Return to Swissie Strength
The Swiss Franc saw major swings in price action this week, but never strayed from its range of 1.2120-1.2220 as traders have become decidedly risk-seeking once again and have brought the carry trade back in vogue. Meanwhile, economic data played almost no part in USDCHF trade, though the release of SVME PMI did send the pair briefly spiking higher. The manufacturing indicator unexpectedly slipped to 62.0, as demand for Swiss products has been slowly easing back. While this represents a more negative sentiment for the sector and plays into the theme of gradually weakening expansion in the country, SVME PMI still holds at relatively robust levels as the manufacturing sector continues to expand. Although the Swiss National Bank will likely look primarily to inflation data when deciding monetary policy, the central bank will also be able to note that manufacturers remain resilient as last year’s rate hikes to 2.25 percent have had little negative impact on them.

The Swiss economic calendar is nearly a clean slate next week with only the unemployment rate on tap. The labor market in Switzerland has remained remarkably tight as economy continues to expand, and the month of March isn’t likely to show much deviation. As a result, the Swiss franc may see little in the way of volatility from fundamentals and may continue to ride the current of the other major low-yielder, the Japanese Yen. In fact, the USDJPY broke out above 118.50 during the week – a key level for the pair which could signal major impending weakness for the Yen and thus, the Swiss franc as well.

Will Loonie Retrace on Trade Data?
The Canadian dollar rose sharply last week as employment data hit the tape five times stronger than forecasted. Indeed, the net employment change surged 54.9K against estimates of a milder rise of 12.0K, with the breakdown showing that hiring has shifted from the manufacturing sector to the services sector. While this is clearly a positive for services and not entirely surprising, as such movements have been witnessed in the UK and Europe – but most abundantly in the US – as the importance of the manufacturing industry diminishes, the release is just one more indication that demand for Canadian products domestically and abroad may be waning. However, given the surprise jump in Ivey PMI to 67.3, the manufacturing sector shouldn’t be considered out of the running yet, especially since the release saw its biggest boost from the employment component. Overall, data continues to show that the Canadian economy still fares well and will likely keep the Bank of Canada at 4.25 percent, especially as underlying price pressures remain hot.

The Canadian calendar is even lighter than that of the US over the coming week. Construction activity for the month of March is forecasted to rise with the annual pace of ground breakings to accelerate to 215,000. For the economy, housing is a vital component to the recent strength in consumer spending. On the other hand, the considerable drop in building permits reported last week may tell the market to be prepared for disappointment. Wrapping up the week will be the International Trade Balance, which could serve as a major market mover should the data reflect a marked slowdown in export growth, putting additional pressure on the consumer to drive Canadian expansion. As a result, Loonie strength could lose steam and keep USDCAD elevated above the 1.1500 level over the course of the week.

Aussie Employment Change to Dominate Direction
Unchanged interest rates left the Australian dollar sharply lower in the wake of the RBA announcement, but a quick reversal showed that Aussie bulls are unwilling to concede much ground. Earlier economic data certainly boosted the likelihood of such an interest rate hike, as Retail Sales showed back-to-back impressive gains at 0.9 percent. It seems as though the Reserve Bank of Australia may wait for the upcoming inflation print to make a decision on the future of short-term rates. The policy-setting committee releases no official statement when it leaves rates unchanged, leaving little guidance as to whether it is leaning towards an imminent hike. The subsequent strength of the Australian dollar will very much depend on forthcoming economic data.

Thursday’s Employment Change figures will dominate an otherwise quiet week of economic reports. Previous employment gains leave the headline figure susceptible to immediate retracements—consistent with consensus estimates of a 7.0k drop. The 15.0k forecast is nonetheless supportive of labor market tightening and will only lend to robust Australian economic growth. Needless to say, any surprises in either direction could easily send AUD pairs on the move. Otherwise, markets will trade off of second-tier Business Confidence and Home Loans figures.

Kiwi’s Meandering May Turn To Direction with Data
Testing the resolve of major resistance above the 7200 level, the kiwi dollar merely drifted against its US counterpart last week, as traders stand by for clear fundamental impetus to support their technical projections. Over the past five days of price action, the only legitimate indicator to be released from the economic coffers was ANZ’s Commodity Price Index for March. While the gauge printed at a three-month high, its effect on the market was minimal. Instead, the New Zealand dollar took its direction from the ongoing tug of war in the markets on the future if the carry trade. From the technical perspective, NZDUSD set a fresh 23-month high, but through a break that evolved at a crawl rather than with the robust momentum volatility traders typically look for.

In the coming days, the market may put the kiwi in motion once again as the economic calendar becomes decidedly busier. The first repot to test the market will be the NZIER Business Opinion Survey for the first quarter. Like all the indicators due over the week, the sentiment report has no official consensus attached to it. Regardless, the five year high set in the fourth quarter will set the mood. Once again healthy domestic demand will compete with depressed export sales to guide business leaders’ outlooks. Another factor that will certainly play against optimism will be the RBNZ’s decision to raise the nation’s overnight cash rate to a record 7.50 percent in March. In all likelihood this policy decision will show more prominently through in the ANZ’s Business PMI for March. In any case, deteriorating sentiment from the spring well of consumer spending (through employment and wages) will certainly weigh on domestic demand, it is just a matter of when. When all is said and done, the retail sales data will be the lynchpin of the week. After the central bank’s decision to lift rates, Governor Alan Bollard clearly drew the line in the sand when he said he would need to see a cooling of the housing market and consumer spending before he would ease his hawkish ways. Should retail sales pull back from January’s considerable rise – perhaps on rising energy prices – it may be a first step after last week’s CPI number to indicate that the tightening may come to a halt.

Boris Schlossberg is a Senior Currency Strategist at FXCM.