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USD: Big Miss in NFP Kills Risk

Kathy Lien, Director of Currency Research, GFT

This morning's non-farm payrolls report was a complete disaster. With jobless claims declining in the month of May, everyone was looking forward to a NFP number that would soothe the markets. Unfortunately, the 69k increase in jobs was the weakest in 20 months, coming under the expectations of the most pessimistic economist surveyed by Bloomberg. Making the report even worse was the increase in the unemployment rate from 8.1 to 8.2 percent and the sharp downward revision in April payrolls. At this point, the Fed has very little reason NOT to pull the trigger on QE3 because there was not just one but two months of job growth under a 100k. If the Fed doesn't offer more stimulus soon, the U.S. economy could be headed back to recession.

The dollar sold off against all of the major currencies from the Yen to the euro, prompting what smelled like Bank of Japan intervention in USD/JPY which rose from 77.70 to 78.70 in less than 5 minutes. Nothing has been confirmed but this is certainly the BoJ's style. As we get closer to the U.S. market open, we could see the EUR/USD resume its slide because at the end of the day, the non-farm payrolls report gives investors an even better reason to deleverage. Barring any surprise announcement from policymakers, the EUR/USD is headed for support at 1.21.

The guts of the labor market report were just as weak as the headline number. Private sector payrolls grew a mere 82k compared to a forecast for 164k. Average hourly earnings growth rose only 0.1 percent while average weekly hours worked dropped to 34.4 from 34.5. Personal income growth slowed to 0.2 from 0.4 percent while personal spending rose 0.3 percent. This tells us that Americans are spending more even though their incomes are dwindling and they are working less.

Yet even if the Federal Reserve decides that it is time to introduce another round of asset purchases, it will not be the long term solution.   The problems come from Europe and the Europeans are the only ones that can bring stability to the financial markets. The sharp decline in equities and currencies last month will pressure European officials to act quickly. The U.S. NFP report, U.K. and Chinese PMI reports tell us that the world is headed for slower growth and at some point this could require a coordinated response from global policymakers. There's certainly no shortage of opportunities for European officials to respond this month. For example, the ECB could easily lend support to the markets by hinting that more stimulus is on the way next week. The smartest thing for policymakers to do is to ease simultaneously.

U.K. markets are closed on Monday and Tuesday for a four day weekend giving Greece another perfect opportunity to make a big announcement and utilize market closures to their advantage. While the chance of a Greek decision on the euro this weekend remains slim, it is a serious risk that cannot be ignored and a possibility that the world is already preparing for.