Forex: U.S. Non-Farm Payrolls Expand 244K, U.S. Dollar Rally Cut Short By Risk Appetite

The 244K expansion in U.S. Non-Farm Payrolls certainly sparked a rebound in risk appetite, with the higher-yielding currencies gaining ground following the larger-than-expected rise in employment, but the data ultimately generated a bearish reaction in the USD, halting the near-term correction across the major exchange rates.

Talking Points

• British Pound: Core U.K. PPI Tops Forecast
• Euro: Threatening Upward Trend
• Canada Dollar: Employment Growth Gathers Pace
• U.S. Dollar: Non-Farm Payrolls Tops Forecast, Consumer Credit On Tap

The 244K expansion in U.S. Non-Farm Payrolls certainly sparked a rebound in risk appetite, with the higher-yielding currencies gaining ground following the larger-than-expected rise in employment, but the data ultimately generated a bearish reaction in the USD, halting the near-term correction across the major exchange rates. Indeed, the EUR/USD pulled back to 1.4456 immediately following the release, but the decline was certainly short-lived as price action bounced back above 1.4500 to pare the sharp decline from earlier this week. The rebound in the euro-dollar suggests that the upward trend from earlier this year will be maintained going forward, but really drives the question on what can prop up the U.S. dollar as we continue to see positive developments coming out of the world's largest economy.

The breakdown of the report showed private sector employment increased 268K to mark the biggest advance since February 2006, while manufacturing payrolls increased another 29K following the 22K expansion in March. However, we saw the jobless rate advance to an annualized 9.0% during the month as discouraged workers returned to the labor force, while hourly average earnings slowed in April following the upward revision in the previous month's reading. As the Fed expects unemployment to remain elevated for some time, we will certainly need to see a much faster pace of expansion in employment to encourage the central bank to lift the benchmark interest rate off the record-low, and Chairman Ben Bernanke may continue to talk down speculation for higher borrowing costs at the next meeting on June 22 as he aims to encourage a sustainable recovery. In turn, the greenback may face additional selling pressures heading into the second-half of the year, and the U.S. dollar index may continue to retrace the rebound from back in 2008 as risk sentiment continues to dictate price action in the foreign exchange market.

The Euro pared the overnight advance to 1.4586 as members of the Governing Council talked down speculation for another rate hike in the first-half of 2011, and the single-currency may face additional headwinds ahead of the next policy meeting in June as European Central Bank President Jean-Claude Trichet continues to soften his hawkish outlook for monetary policy. During an interview with CNBC and Bloomberg TV, the central bank head said that the group remains ‘extremely alert' as it aims to stem the risk for second-round effects, but the recent commentary suggests that the committee will keep the benchmark interest rate on hold going into the second-half of the year as the economic outlook remains clouded with high uncertainty. As interest rate expectations falter, the EUR/USD is certainly threatening the upward trend from earlier this year, and the euro-dollar may enter a phase of consolidation should price action struggle to hold above the 78.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.4430-50.

Heightening price pressures in the U.K. pushed the British Pound to a high of 1.6436 during the overnight trade, but the lack of momentum to push back above the 20-Day moving average (1.6444) could lead the near-term correction to gather pace in the week ahead as the pair continues to search for support. Indeed, the higher-than-expected print for core U.K. producer prices helped the sterling to pare the decline to 1.6353, but the rebound in the exchange rate could be short-lived as the Bank of England is likely to maintain a dovish tone for monetary policy while delivering its quarterly inflation report on May 11. As BoE Governor Mervyn King continues to highlight the ongoing weakness within the real economy, we are likely to see the central bank head talk down speculation for higher borrowing in Britain, and the GBP/USD may further retrace the advance carried over from the previous month as interest rate expectations falter. In turn, the pound-dollar may threaten the upward trend from earlier this year, and a break below the 50-Day SMA at 1.6285 will surely expose the 23.6% Fibonacci retracement from the 2009 low to high around 1.6200-20.

Nevertheless, currency traders showed a bullish Canadian dollar reaction to the region's employment report as the economy added the most jobs since January, and the pullback in the USD/CAD is likely to gather pace over the coming days as economic activity in Canada continues to outpace the recovery in the world's largest economy. As the outlook for growth and inflation improves, the Bank of Canada may drop its pledge to ‘carefully consider' future rate hikes at its next policy meeting on May 31, and the central bank may see scope to normalize monetary policy further later this year in order to balance the risks for the region. According to Credit Suisse overnight index swaps, investors are pricing a 9% chance for a 25bp rate hike in May, but see borrowing costs in Canada increasing by nearly 100bp over the next 12-months as

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To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com

FX Upcoming

Currency	GMT	EDT	Release	Expected	Prior
USD	19:00	15:00	Consumer Credit (MAR)	$5.000B	$7.617B

Currency	GMT	Release	Expected	Actual	Comments
AUD	23:30	AiG Performance of Construction Index (APR)	--	37.9	Continues to decline
JPY	23:50	Monetary Base (YoY) (APR)	--	23.9%	Touches record high
CHF	05:45	Unemployment Rate (APR)	3.3%	3.1%	Lowest since Dec. ‘08
CHF	05:45	Unemployment Rate s.a. (APR)	3.2%	3.1%
EUR	06:45	French Central Govt Balance (MAR)	--	-33.6B	Deficit widens out again
GBP	08:30	PPI Input (MoM) (APR)	1.6%	2.6%	Figures show that pipeline pressures are still very much alive.
GBP	08:30	PPI Input (YoY) (APR)	16.3%	17.6%
GBP	08:30	PPI Output (MoM) (APR)	0.7%	0.8%
GBP	08:30	PPI Output (YoY) (APR)	5.1%	5.3%
GBP	08:30	PPI Output Core (MoM) (APR)	0.6%	0.6%
GBP	08:30	PPI Output Core (YoY) (APR)	3.0%	3.4%
EUR	10:00	German Industrial Production (MoM) (MAR)	0.5%	0.7%	Expands for the third consecutive month.
EUR	10:00	German Industrial Production (YoY) (MAR)	10.3%	11.2%
CAD	11:00	Net Change in Employment (APR)	20.0K	58.3	Biggest gain since January, a jobless rate falls to the lowest since December.
CAD	11:00	Unemployment Rate (APR)	7.7%	7.6%
CAD	11:00	Full Time Employment Change (APR)	--	17.2
CAD	11:00	Part Time Employment Change (APR)	65.0	41.1
CAD	11:00	Participation Rate (APR)	66.9	67.0
USD	12:30	Change in Non-Farm Payrolls (APR)	185K	244K	Largest employment growth since May 2010, jobless rate rises for first time since November.
USD	12:30	Unemployment Rate (APR)	8.8%	9.0%
USD	12:30	Change in Private Payrolls (APR)	200K	268K
USD	12:30	Change in Manufacturing Payrolls (APR)	20K	29K
USD	12:30	Change in Household Survey Employment (APR)	--	-190K
USD	12:30	Average Hourly Earnings (YoY) (APR)	1.8%	1.9%	Slower wage growth dampens outlook for future consumption.
USD	12:30	Average Hourly Earnings (MoM) (APR)	0.2%	0.1%
USD	12:30	Average Weekly Hours (APR)	34.3	34.3