The dollar was perched near multi-week highs on Friday, basking in its biggest gains in about a month after robust jobs data threw investors’ focus on to the strength of the U.S. recovery and on the possibility of it driving policy tightening.
The next test comes later in the day when U.S. non-farm payrolls data is published. The Street’s consensus forecast is for about 650,000 jobs to have been added in May, though the “whisper number” among traders is higher, closer to 800,000.
Private payrolls – a bit of an unreliable guide – delivered a big beat overnight with an increase of 978,000, against forecasts of 650,000, which sent the dollar rallying.
It lifted 0.7% to a three-week high of $1.2118 per euro and rose by the same margin to a two-month high of 110.32 yen. Gains topped 1% against the Aussie and the kiwi, which fell from recent ranges to their lowest in weeks.
China’s offshore yuan softened past 6.4 per dollar in early Asia trade, while other moves were only slight as markets now await the payrolls figures, due at 1230 GMT, with options trade showing it is expected to trigger volatility.
“Clearly traders are covering dollar shorts into the jobs data,” said Chris Weston, head of research at brokerage Pepperstone in Melbourne.
He reckons, as a rough guide, that a million or more jobs might see the Aussie fall by another 1%, the euro drop about 0.8% and the dollar/yen exchange rate gain that amount as traders factor in a policy response to the strong economy.
“Between 250k-500k jobs and we’ll potentially see dollar/yen fall 0.6% to 0.8%,” Weston said. “A number in line will not give us much to work with, so the moves in the market will be dictated by the broad quality of factors – revisions to the April print of 266k, the unemployment rate, hourly earnings.”
At issue is whether the figure points to the sort of hiring that could reel in pandemic job losses, lift wages and drive broad U.S. growth that increases the trade deficit and weighs on the dollar – or whether things feel like they are overheating.
Positioning data shows investors heavily short dollars, leaving the market hypersensitive to any suggestion of a change in direction for the currency or a shift in the rates outlook – hence the options market is priced for a bumpy ride.
Overnight implied dollar/yen volatility shot up to a month high above 8% on Thursday and euro/dollar implied volatility hit its highest since mid-March.
Brian Daingerfield, head of G10 currency strategy at Natwest, sees a payrolls print around 550,000 as the “goldilocks” number: “strong enough to keep the recovery going but not strong enough to pull tapering fears forward.”
That could weaken the dollar broadly, he said, offsetting Thursday’s moves, while bonds could recover lost ground. Benchmark ten-year U.S. Treasury yields rose 3.6 basis points to 1.6300% overnight and opened near that level in Tokyo on Friday.
The U.S. dollar index, which measures the greenback against a basket of six major currencies, rose 0.7% on Thursday to stand at a three-week high of 90.574 on Friday.
The Australian dollar was licking wounds at $0.7652, after falling to its lowest since mid-April overnight, while the kiwi was parked at $0.7136 after slipping to its cheapest since early May on Thursday.
Sterling was steady at $1.4099 in Asia after dropping through its 20-day moving average as the dollar climbed. The yuan fell to 6.4014.
Cryptocurrencies held on to several days of gains to leave bitcoin at $38,737 and on course for its best week in a month.