The U.S. dollar fell to a four-month low against a basket of its major rivals overnight as investors awaited this morning’s closely watched U.S. payrolls data for February. This week, ADP’s private sector jobs report and the ISM services sector report both surprised to the downside, increasing expectations that February’s reading of America’s jobs market may disappoint as well. Both December and January’s employment reports showed a marked downturn in hiring and suggested the economy likely shifted into a lower gear around the start of the year. While weather has likely played a key factor in recent economic weakness in the U.S., persistent signs of slowing could ultimately prompt the Fed to rethink its outlook for continued steady reductions in stimulus. Such a scenario would likely see the dollar remain vulnerable.
The euro jumped to a two and a half-year high against the struggling U.S. dollar after yesterday’s decision by the ECB to leave monetary policy unchanged. Following another dangerously low reading of inflation in the euro zone for February, many had expected the ECB to either ease monetary policy or signal that a move would come in the very near future. Lack of action by the ECB and the seemingly sanguine tone of President Draghi’s comments suggested little chance of another rate cut by the ECB anytime soon. A report overnight showing that banks in the euro zone will payback a larger than expected portion of emergency loans to the ECB next week added to the single currency’s broadly improved tone.
The British pound fell to three-week low against the broadly stronger euro but held near recent highs against the dollar. Investors awaited this morning’s U.S. payroll data before pushing the pound in either direction.
The Canadian dollar held near a two and a half-week high against the weaker greenback ahead of both U.S. and Canadian jobs reports for February this morning.
EUR: The euro soared to a two and a half-year high against the broadly weaker U.S. dollar overnight after the ECB sounded a much less dovish tone yesterday than many had expected. The European Central Bank left its key lending rate unchanged yesterday and made no indication that it was ready to ease monetary policy anytime soon. Following another dangerously low reading of euro zone inflation in February, many were expecting the ECB to at least signal that further easing was imminent. The fact that President Draghi saw inflation expectations as “solidly anchored” suggest officials are not very concerned with deflationary risks in the 18-member bloc. Separately, data showed that banks in the euro zone will payback 11.4 billion euros in emergency loans to the ECB next week, which is roughly six times the expected amount. The repaying of emergency loans to the ECB essentially shrinks the size of the European Central Bank’s balance sheet at a time when the Fed and the Bank of Japan are still aggressively increasing their respective balance sheets. The resulting rise in euro zone money market rates adds broad support to euro.
GBP: The British pound fell against the broadly stronger euro overnight but was largely unchanged against the otherwise weaker U.S. dollar. The Bank of England expectedly left monetary policy unchanged yesterday and provided investors with no statement. The pound, which remains near multi-year highs against the dollar, may struggle to add to recent gains with much of the positive outlook for the U.K. economy already largely priced into sterling’s valuation. Going forward, the pound will likely need some very positive news to push higher.
JPY: The Japanese yen, which had gained against the dollar overnight, fell to a six-week low in the wake of this morning’s stronger than expected U.S. payrolls data. The yen will remain pressured in the wake of positive U.S. economic data, but its downside will remain limited by the potential for another flare up in geopolitical uncertainty or heavy selling in emerging market and higher risk assets.
CAD: The loonie fell to session lows against the dollar after data showed the economy north of the border surprisingly shed 7,000 jobs in February versus expectations for an increase of 15,000 workers.
USD: The U.S. economy added 175,000 new jobs in February, well above the 139K expected. While the jobless rate ticked up to 6.7% last month, January and December saw upward revisions to payrolls totaling 25,000 new jobs. The positive jobs report this morning helped push the 10-year Treasury bond yield to its highest since Jan. 23 and importantly, saw its yield premium over 10-year German Bunds rise to its highest since mid-2006. While near-term volatility is likely, further rises in U.S. Treasury yields should help support the dollar.