Sustainability Of Dollar Rally Hinges On Payrolls

With the European Central Bank's monetary policy announcement behind us, the focus of the forex market will now turn to the non-farm payrolls report. The newly delivered stimulus from the ECB and the better than expected U.S. jobless claims report boosted the attractiveness of the U.S. dollar against all major currencies. Whether or not the sell-off in the EUR/USD and rally in USD/JPY can be sustained will hinge on Friday's non-farm payrolls report. This week's FOMC statement tell us that that Federal Reserve officials aren't overly concerned about the health of the labor market as they completely ignored last month's sharp drop in payrolls, choosing instead to repeat that the labor market is improving. They better be right or else the dollar and U.S. stocks for that matter will come crashing down. Currently economists are looking for payrolls to rise by 140K in April, up from 88K in March. The drop in jobless claims and consumer confidence supports a stronger release and we believe that as long as payrolls rise by 150K or more, the dollar will rally. By cutting interest rates today and signaling that they are prepared to do more, the ECB has set a low bar for tomorrow's NFP release. Anything above 150K will be a relief because it means that the Federal Reserve will not be increasing stimulus alongside the ECB. However if payrolls rise by less than 100K, we expect to see a big short squeeze in the EUR/USD. Anything between 100k and 150K will probably elicit only a mild reaction in the greenback.

For USD/JPY, a marginally positive report is all the currency needs to rally. We have already seen a nice gain today on the back of better than expected data. U.S. jobless claims dropped to 324K this week, its lowest level in more than 5 years. Continuing claims edged higher but the increase was small. The country's trade deficit also narrowed 11% to -$38.8B from -$43.6B. We are finally seeing some good news for the U.S. economy and this should keep the dollar supported at a time when the ECB has just added to their easing program. Non-farm payrolls are scheduled for release tomorrow and jobless claims have been consistent with an uptick in job growth.

EUR Erases Gains as ECB Cuts Rates and Suggests Doing More
What a day it has been in the forex market. The euro shot above 1.32 after the European Central Bank's rate decision but sold off aggressively when Mario Draghi said the ECB has an "open mind on negative deposit rates." Before the rate decision, we said a rate cut alone would not kill the euro rally, instead the ECB needed to be willing to do more and Draghi wasn't messing around when he said that "all options are open" and the "ECB stands ready to act if needed." The central bank delivered in a very big way today by cutting their main refinancing rate by 25bp, their lending rate by 50bp and extending their fixed rate allotment until July of next year - their willingness to consider negative deposit rates was just icing on the cake. Based on the ECB's actions and the number of times Draghi used the word weaker in his introductory statement, the central bank is very worried about the outlook for the Eurozone economy and lack of lending. More specifically, Draghi pointed to weak labor market conditions and short-term indicators as reasons for why easier monetary policy was needed. He also said the weakness in growth has now expanded beyond the peripheral to core economies. With inflationary pressures declining on the back of lower price pressures, now was the perfect time for the ECB to ease. Yet the central bank did such a great job of preparing the market for a move before the announcement that the rate cut itself did not hurt the euro much. Instead expectations for future monetary policy actions killed the euro rally because this is not a one and done scenario according to Draghi. In the long run, the measures taken today will provide underlying support for the Eurozone but given how low rates have been for the past few months, we are skeptical about how much real impact it will have on the economy. Looking ahead, expect further losses in the EUR

GBP - Could Hit 3 Month High Against EUR
The British pound traded sharply higher against the euro today but gave up part of its recent gains against the greenback. U.K. data continued to surprise to the upside with manufacturing activity contracting at a slower pace in April. In fact, the index rose from 47.2 to 49.4, just below the 50 boom/bust mark. If you recall, the same improvement was seen in the PMI Manufacturing report released yesterday. Both manufacturing and construction activity are now almost back to expansionary levels which will be a relief for the Bank of England and good news for the pound. PMI services are due for release tomorrow and the sector is expected to remain in expansionary territory. If all 3 PMI reports show improvements in the U.K. economy, the case for a rate cut weakens and with the ECB talking about doing more, the GBP could soar to a fresh 3 month high against the euro.

AUD - Major Contraction in Manufacturing Sector
Disappointing economic data continued to drive the Australian dollar lower against all of the major currencies with the exception of the euro, which was hit by ECB comments. Following up on Wednesday's big deterioration in manufacturing activity, building approvals plunged 5.5% in March, import prices stagnated in the first quarter while export prices grew 2.8% compared to a forecast for 4.5% growth. Softer inflationary pressures, weaker housing market activity and a deeper contraction in manufacturing support the case for additional easing from the RBA. HSBC also revised down its initial Chinese manufacturing PMI estimate from 50.5 to 50.4 - while this was not a major revision, it confirms economic activity in the world's second economy is slowing, creating more headaches for its trade partners. The Canadian and New Zealand dollars on the other hand held steady with the CAD trying to extend its gains following stronger trade numbers. Thanks to healthier manufacturing activity, Canada turned a trade surplus in the month of March. Originally, economists were looking for the country's deficit to narrow from -1.02B to -0.70B but instead Canada reported a surplus of 0.02B. This improvement along with the more than 3% rise in oil prices drove the CAD sharply higher against all of the major currencies except for the U.S. dollar. No major economic reports were released from New Zealand but AUD/NZD dropped to a 2.5 year low today with further losses possible if tonight's Australian and Chinese service sector data disappoints.

JPY Resumes Slide, Japan Closed on Friday
With U.S. stocks powering higher today, the Japanese Yen traded lower against all of the major currencies. Last night, the Bank of Japan released the minutes from their April 4th monetary policy meeting but the impact on the Yen was nominal. Although the minutes showed that policymakers were confident that 2% inflation can be achieved in 2 years time, since then we have seen more divergent views and internal skepticism. If you recall, according to the BoJ's semi-annual economic outlook, which was released last week, CPI is expected to hit 1.9% in March 2016, which would be 3 and not 2 years from now. In other words they just started to ease and they have already resigned themselves to failure. The range of forecasts are also very wide with some members looking for CPI to be at 0.8% and others at 2.3% which implies that there is a huge amount of division within the central bank. In other words, traders should not make too much of the minutes released last night. Japanese markets are closed tonight / tomorrow for Constitutional Memorial day and as such trading in Asia should be quieter than usual.