3 NFP-Inspired Dollar Trades

Kathy Lien

The latest US non-farm payrolls report supports the Fed’s intentions to reduce asset purchases as soon as September, clearing the way for the dollar to rally versus counterparts like the euro, yen, and British pound.

The US dollar (USD) ripped higher against all major currencies today after the US non-farm payrolls (NFP) report confirmed the Federal Reserve is on track to taper asset purchases this year.

Going into this key release, investors were looking for confirmation that the US economy could handle a reduction in stimulus, and they also wanted evidence that the labor market is improving like the Fed predicts. While the unemployment rate held steady at 7.6%, stronger-than-expected job growth and upward revision to the May report gave everyone confidence that the jobless rate will slowly decline and meet the central bank's lowered expectations.

Non-farm payrolls hit 195K in June, the same amount as the previous month, but only after a 20K upward revision. While economists were looking for a drop in the unemployment rate, the addition of more than 200K private sector jobs and increase in average hourly earnings was enough to send the dollar and US bond yields sharply higher.

The ten-year Treasury yield jumped ten basis points (bps) from 2.56% to 2.66%, reaching its highest level since August 2011. Meanwhile, USDJPY broke 101, GBPUSD dropped below 1.49, and EURUSD made its way towards 1.28.

Compared to many of the other major currencies, the selloff in EURUSD has been modest so far, but it should only be a matter of time before the currency pair catches up with its peers.

GBPUSD has been hit the hardest and is extending a selloff that has taken the pair down more 2.5%, or 400 pips, in the last 48 hours.

We believe this latest non-farm payrolls report will prompt the Federal Reserve to taper asset purchases in September. There are only two real opportunities to do so this year—September and December—and this is such a major monetary policy shift that Fed Chairman Ben Bernanke will want to clarify the central bank's position at the post-meeting press conference. If the Fed believes that the US economy can handle it, policymakers would much rather taper for the first time in September, as opposed to December, because the December meeting is too close to the holidays.

With labor market numbers confirming that the US economy is performing well enough for the central bank to reduce stimulus, we expect a further rally in the dollar. As US yields head towards 3%, we should not only see more investors cut their dollar-funded carry trades, but also Japanese companies hedging against a rising yen (by selling dollars) will soon find those hedges too expensive to bear.

We are seeing more investors buy dollars outright, and all of these factors should help drive the EURUSD below 1.28, USDJPY to 103, and GBPUSD below 1.48.

By Kathy Lien of BK Asset Management

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