Can dollar hold gains after jobs data?

2 Jun 2023

What a strange jobs report that was! On the one hand, the headline number suggests all is well in the economy with the addition of a very strong 339K jobs. But the rise in the unemployment rate to 3.7% from 3.5% completely contradicts the jobs growth. The unemployment rate is based on a household survey, so there is always going to be some deviation. But with the latter showing a fall of 310K in employment and a rise of 440K in unemployment (and thus a higher unemployment rate), this is too wide a discrepancy to ignore.

US indices maintained their gains as stock market investors cheered the goldilocks jobs report. The S&P broke to a fresh 2023 high to hit its highest level since last August. But it was the small caps in the Russell and the Dow that rallied the most.

In FX, the dollar rallied following the mixed jobs report as investors figured there was now a slightly higher chance the Fed will deliver a 25-basis point rate increase at it is next meeting. However, given the mixed jobs report, I think there is a good chance the dollar may go back lower, either later today or in early next week, especially against risk-sensitive currencies like the AUD and CAD which have otherwise had a decent week. Meanwhile the Dollar Index was testing key resistance around 104.00, at the time of writing.

What does the jobs report mean for Fed policy?

All told, the hawks at the Fed will be a little concerned by the (apparent) strength in the jobs market but will be wise enough not to ignore the household survey and weakness in the manufacturing sector. Therefore, questions remain wide open as to whether the Fed, everything considered, will deliver that final hike in June.

Investors will probably have a much better idea once the inflation report is published on June 13th, a day ahead of the FOMC rate decision. The focus for next week will be on the ISM services PMI, due for release on Monday.

Next week’s top macro events


1. ISM services PMI (Monday) up next

Speculation over whether the Fed would hike interest rates in June or not caused significant dollar movements this week. Initially, it was higher but then slumped after Jefferson’s ‘skip’ comments, before rising slightly again on the back of a mixed jobs report. Whether the rate hike probabilities shift significantly again will now depend on a couple of key data releases between now and the FOMC’s next meeting on Jun 14. These include the latest ISM services PMI for May, due on Monday, and last month’s inflation figures due on 13th June.

2. RBA rate decision (Tuesday) will keep the AUD/USD in the spotlight

Australia’s consumer prices rose 6.8% year-over-year in April on a jump in fuel prices and strong gains in housing. This was well above expectations and suggest sticky inflation will likely keep pressure on the central bank. However, soft data out of China had kept the AUD undermined, until its sharp recovery this week. Will that bullish momentum continue going forward?

3. BOC (Wednesday) could deliver hawkish hold

At this meeting, we are doubtful the BOC will deliver a hike as it will want to await more data to support the case for a hike. The BOC lifted rates to the current 4.5% at its January 25 meeting and has since sat pat for the next two meetings in March and April. But improving Canadian data suggests the central bank could provide an additional 25 bps in the upcoming months.

If Canadian data continues to point towards an economy remain hot, then this should increase the odds of an additional 25 bps hike from the BOC in the upcoming months. At its next meeting on Wednesday, look out for hawkish comments.