U.S. Job Report Beats Expectations, Aids U.S. Dollar Recovery

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The Dollar extended its rebound against major and emerging market counterparts on Friday after official data showed America's labour market recovery continuing in the face of surging coronavirus infections last month, although global factors may matter as much for the currency's outlook. 

U.S. unemployment came down from 12.3% to 10.9% in July if the Bureau of Labor Statistics measure is anything to go by, a better outcome than the 10.5% anticipated by consensus, which resulted from a better-than-expected increase in the number of new jobs and little change in the so-called participation rate. 

1.763 million jobs were either created or recovered from the coronavirus in July, down from a downwardly-revised 4.791 million previously but higher than the 1.530 million increase that consensus had looked for.

Wages ticked higher by 0.2% when markets looked for a -0.5% fall but this was not enough to make up for the -1.3% contraction seen previously.

"The US labor market continued to gain back jobs lost during the lockdown in July, but at a slower pace than in prior months, as an acceleration in new virus cases posed a challenge to the recovery," says  Katherine Judge, an economist at CIBC Capital Markets. "The escalation in new virus cases since re-opening has required the re-introduction of social distancing measures in many states recently and has resulted in reduced mobility."

The Dollar was already higher to begin with but made further headway against Pound Sterling, the Euro and others in the wake of the report. Stock markets saw no discernible boost, indicating that Dollar gains might be the result of risk aversion rather than any perceived improvement in the economic outlook. U.S. bond yields came down on the latter side of that fence, with 2-year yields seeing the steepest falls.

"Hospitalizations lag cases so their decline is not as widespread as that of cases, but they have fallen in 25 states over the past week decline will broaden over the next week," says Ian Shepherdson, chief economist at Pantheon Macroeconomics. "The apparent bending of the curve in France proved to be an illusion. The French data are inexplicably wild but the latest numbers are grim. Cases continue to rise very rapidly in Spain and the Netherlands, while the rate of increase in Germany is slower, and linear. Belgium's new case growth has slowed considerably in recent days, but we need more data to be sure that this is a real change in the trend. The second waves in Austria and Switzerland have crested and cases are beginning to fall."

Payrolls grew faster than was expected by the market, but investors have turned near universally bearish toward U.S. assets in recent months and the actual number came in far lower than June's so could be indicative of economic disruption resulting from a then-resurgent coronavirus that pushed new infection numbers to repeated new highs in July before ebbing in August. This month it's been Europe's turn, with increases in all major old continent economies.

"USD appears to be capitalising on the “risk off” mood in markets, although it could also simply be part of its consolidation after July’s sell-off. Equity markets are lower in Asia and Europe, and are likely to open weaker in the US on the back of President Trump’s executive order limiting business with Chinese-owned WeChat and TikTok apps. The escalation in tensions comes ahead of the six month review next week of the US China “Phase one” trade deal," says Daragh Maher, head of Americas FX strategy at HSBC.

Friday's news agenda was also dominated by White House decisions to ban certain Chinese technology companies from the country.

Transactions with TikTok's owner Bytedance will banned 45 days from Friday for U.S. entities, a decision that's thought to be aimed at speeding up a divestment of the company's U.S. social network. China's WeChat network, which is owned and operated by a separate company, was also subjected to a similar order.

"We have recommended a short EUR/USD trade idea to reflect potential downside risks for EUR which is overdue a correction lower. It is not without risks though given it is not yet clear cut that the relentless USD sell off has run its course ahead of Jackson Hole later this month. At the same time, downside risks for the pound have eased after the BoE pushed back against expectations for negative rates in the UK.," says Derek Halpenny, head of research, global markets EMEA and international securities at MUFG. "The experience from 2018 highlights though that it could have broader implications for the FX market if the situation in Turkey continues to intensify."

In addition, the U.S. administration also reimposed import tariffs on Canadian alluminium, further undermining risk appetite that was already fragile to begin with, stoking demand for the Dollar and losses for most other currencies.

However, the risk averse mood in markets didn't reach as far as the precious metals space, where gold and silver hit new highs earlier in the week. Precious metals were undermined by the Dollar turnaround, which makes all Dollar-denominated assets more expensive for non-U.S. buyers.

Of all the currencies monitored by Pound Sterling Live, the Turkish Lira was only one to rise against the Dollar following a sharp slump in the prior session, with both moves being felt elsewhere the markets.