Dollar gets smoked ahead of nonfarm payrolls

Dollar braces for critical US jobs report

An action-packed week in global markets will come to a crescendo today with the latest US employment report. Nonfarm payrolls are projected to have risen by 200k in February, less than the previous month but still a solid number overall. The unemployment rate is seen holding steady, while wage growth is expected to have lost some steam.

It’s crucial to note that the nonfarm payrolls print and the unemployment rate come from two different surveys, which have been flashing conflicting signals for some time. Nonfarm payrolls have risen steadily over the past year, but the number of employed people as measured by the household survey has been almost stagnant during this period. 

Hence, the US labor market has started to show some cracks, even if it appears robust on the surface. Investors will be looking for clues as to which of these surveys is correct.

Some early indicators warn that labor market conditions softened in February. The employment sub-indices of both ISM surveys fell into contraction, something echoed in the S&P Global PMIs, where the pace of job creation slowed. That said, there were no signs of mass job losses either, as applications for unemployment benefits remained historically low.

Blending everything together, the tea leaves point to a disappointment in this employment report, but nothing dramatic. The dollar has been pummeled this week as the Fed telegraphed its intentions to slash rates later this year, and any signs the jobs market is cooling could amplify the selling pressure, even if the US economy seems to be in better shape than its counterparts.

Yen recovers on BoJ speculation, euro rises after ECB 

Another element behind the dollar’s losses this week has been the strength in the Japanese yen, which mounted a comeback as speculation for an imminent Bank of Japan rate increase continues to heat up.

Preliminary results from the spring wage negotiations suggest Japanese workers are on track to receive their biggest pay increase in three decades. Combined with the reacceleration in Tokyo inflation, traders are growing confident the BoJ is about to exit negative rates, assigning almost a 50-50 chance that this could happen as soon as this month. 

Meanwhile, the euro rose yesterday after the ECB downplayed the prospect of cutting rates in April, guiding investors towards a June cut instead. Even though growth and inflation forecasts for this year were slashed, President Lagarde stressed the need to wait for more data - especially on wage growth - before pivoting.

That said, most of the euro’s gains reflected a weaker US dollar as the single currency lost ground against the Japanese yen and the British pound, with the pound receiving support from the euphoric tone in stock markets.

Gold and stocks scale new records

A relentless cross-asset rally has been playing out this year, with stocks, bonds, gold, and bitcoin soaring in tandem. Emboldened by hopes of a soft economic landing and lower interest rates, investors have gone on an epic buying spree, with the fear of missing out and sheer momentum amplifying the moves.

Gold scaled new all-time highs once again early on Friday, bringing its total gains for this month to 6% already amid hefty purchases from central banks, demand from Chinese consumers looking for a hedge, and falling real yields. 

With gold now trading in uncharted waters, the next barrier on the upside might be the psychological $2,200 region, although an even bigger test might lie near $2,245, which is the 161.8% Fibonacci extension of the May-October 2023 decline.

Finally, shares on Wall Street hit another record high yesterday, with the tech sector and Nvidia in particular doing the heavy lifting.