NFP, Grexit Threat Ratchets Up FX Volatility

The U.S. dollar has been lost at sea since March nonfarm payrolls (NFP) numbers fell short of expectations by 120,000 jobs.

The greenback has slumped to a two-month low against a basket of currencies since then. Dollar bulls will be looking for a better-than-expected NFP number to give the buck a boost after so many economic indicators have missed the mark of late. American employment data has been the best performer until the stumble last month. It’s safe to say market participants will be glued to their trading screens awaiting the release at 8:30 a.m. ET.

Though not a direct correlation to NFP, it’s worthwhile to note ADP’s private employment numbers came in below expectations at 169,000 – the first time the number was below 200,000 in two years. The forecast called for a 199,000 gain. Employment continues to be an outlier showing resilience against the factors that have slowed down the economy. But cracks are beginning to appear in the employment component as evidenced by the March NFP data that shocked the markets. The actual number of new jobs was 126,000, well short of the 246,000 expected. The USD has not been able to fully recover from that data point. It took a slightly dovish Federal Reserve statement to prop it up again, but economic indicators continue to point to a slowdown. Interest rate expectations took a hit after the U.S. trade balance showed a larger deficit due to growing imports and lower exports due to a strong U.S. dollar.

A Cause for Concern

Also of significance, weekly U.S. jobless claims managed to upgrade expectations after the ADP payroll report. The number of Americans signing up to receive unemployment benefits rose by 265,000 when the forecast signaled a 277,000 increase.

The headline numbers suggest a strong U.S. economy if it’s able to generate new jobs and keep people employed. The disconnect between the data and reality, however, derives from the aggregate numbers and the financial straits of American families. The Fed is well aware of this after digging deeper into the data.

Job creation has slowed down at large corporations; layoffs are more predominant. Any true job growth has been generated in the small-business sector and largely for part-time positions. That’s hardly the stuff needed to build a sustainable economic growth that could handle higher interest rates, which is why the Fed has not hiked interest rates yet. The impact of employment data and the upcoming monetary policy decision by the central bank are heavily linked, and it has hurt the USD in the last month. Subsequently, expectations of a June rate hike has shifted to September, and even then there are doubts it will happen this year.

The NFP report will send shockwaves through the market regardless of the headline number and unemployment rate. A miss on either side will result in a volatile trading environment. Large investors have adjusted their positions to reduce their risk exposure ahead of the release. The fixed-income market has experienced a volatile week. German bunds yields have risen by 75 basis points. That is almost like three rate hikes in under three weeks.

Meanwhile, the ongoing Greek debt negotiations continue to muddy the waters and is having a material effect on the EUR. Reportedly, Athens recently stated it won’t bow to its creditors’ demands to make cuts to Greece’s civil service and pensions. Experienced traders know the potential threat of a Grexit (read: Greece’s exit from the eurozone) will only serve to amplify the effect of the NFP release and market volatility.

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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