Week in FX – NFP Drives Dollar Higher

The economic data deluge this week did not disappoint and kept traders busy from start to finish. Central banks continue to exert their influence with their words, actions and lack of transparency. There were no surprises this week as the Bank of England and the European Central Bank held rates and the latter added details to its quantitive easing program. The Reserve Bank of Australia and the Bank of Canada also held rates but expectations were mixed as there was the possibility of rates cuts for both economies but their respective central banks kept the benchmark rates unchanged.

The U.S. non farm payrolls report continues to make the case for a June rate hike by the Federal Reserve. After beating expectations with 295,000 added jobs in February and a decrease of the unemployment rate to 5.5% the market responded by appreciating the USD across the board. Digging deeper into the data released there are question marks about the strength of the employment recovery specially taking into account how many people appeared to have dropped off the map and are no longer taken into consideration in the job metrics.

Lets revisit some of the major events that transpired this week with comments from the MarketPulse team of analysts:

AUD Rate No Rate Cut Statement Surprises Markets

OANDA Asia Pacific Analyst Stuart McPhee described the market reaction to the central bank decision. The RBA on Tuesday held back on further monetary easing, surprising most market watchers who expected a second rate cut in as many months. The central bank kept the benchmark lending rate at a historic record low of 2.25 percent, despite expectations it would do more to battle weak employment, easing inflation and sluggish corporate profits. The RBA lowered rates by 25 basis points last month, its first cut in 18 months, following moves by some 20 central banks around the world that have loosened monetary policy this year. The decision comes on the heels of a surprise announcement by the People’s Bank of China over the weekend to lower its rates, its third aggressive move to stimulate the economy in the last five months. The Australian dollar surged nearly half a cent, from $0.7797 to $7834. Meanwhile, the benchmark S&P ASX 200 index fell into the red, down 0.3 percent. In a statement, the RBA said it’s “appropriate” to leave rates steady for the time being but left the door open for further easing in the future where necessary. It maintained that growth will continue at a below-trend pace and sees domestic demand remaining weak.

CAD GDP and BOC Rate Statement Double Surprise

Canadian GDP beat forecasts by expanding by 0.6 percent in the last quarter of 2014. On an annualized basis the Canadian economy grew by 2.4 percent bringing it close inline to the estimates by the Bank of Canada. The better than expected numbers boosted the CAD and made the announcement from the BOC less of a surprise.

Bank of Canada Governor Stephen explained his January decision to cut rates as a pre-emptive measure given the macro headwinds that the Canadian economy is facing. The GDP figures released a day earlier validated his decision although there are certain doubts about how much did what Canada did produce in the quarter ended up in unsold inventories. The BOC expects most of the negative impact from lower oil prices to hit in the first half of 2015. The fact that they have not hit the economy means that the central bank will be pressured to cut when they do in an effort to boost economic growth, but for the time being that time is not now.

ECB Provides More Details on QE

OANDA Europe analyst Craig Erlam article on the ECB announcements and details on its quantitative easing program launching in March :The ECB press conference set us up for a strong end to the week as Mario Draghi confirmed that the central bank will start purchasing debt of all bar two (Greece and Cyprus) eurozone countries on Monday. Despite his optimistic tone on the outlook, the inflation forecasts appeared to spark something in investors as the euro reversed its gains before breaking below 1.10 for the first time since September 2003. The fact that the ECB doesn’t see inflation returning to 2% in the three year forecasting period, despite its potentially overly optimistic outlook, may have suggested that its QE program will need to go beyond September 2016, which would be euro bearish. If that’s the case then in the short term, this selling in the euro may only have so long to run because QE was pretty much priced in. While I do see parity by the end of the year, I think we could see a decent spring for the euro.

USD Non-Farm Employment Beats Expectations But Raises Doubts

Chief Market analyst Dean Popplewell comments on the stronger than expected non farm payrolls report while labour participation declined in February: The initial take is that Friday’s report provides further evidence that the U.S jobs market remains strong. There are some parts of the report that could restrain overall investor optimism. The full employment rate declined for the wrong reasons – weak household survey employment gain & a decline in the labor force. Average hourly earning edged up just +0.1% m/m, bringing the year-on-year growth rate back down from to +2% from +2.2% (however, it does remain in the “solid” trend of the last few years).

  • Feb payrolls beat big: +295k vs. +235k expected – private sector strong at +288k
  • Unemployment rates drops to Fed’s full-employment scenario +5.5%
  • Solid numbers despite fears from weather and west coast port strike.
  • Miss on wages and participation rate overshadowed
  • Rates, USD up: 0.10bps hike priced for June, up from 0.08
  • Long U.S rates push highs of the year. EUR co;;apses >€1.09
  • The report keeps Fed on track to alter its guidance on interest rates at
    March 17-18 policy meeting – potential drop of “patient”



This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza