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Ray of Sunshine in Payrolls Sends Currencies Soaring

Last updated 10/7/2011 9:00 AM ET (GMT -5) 1 Comments

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Kathy Lien

Director of Currency Research, GFT

A better than expected non-farm payrolls report drove currencies and equities higher across the board. A ray of sunshine in the labor market has injected a fresh dose of optimism that sent the EUR/USD and USD/JPY soaring. Non-farm payrolls rose by 103k in the month of September while private payrolls rose by 137k. The real icing on the cake however was the August NFP report which was revised up from 0k to 57k. In other words, the U.S. economy did not experience zero job growth in August like had everyone had feared. The question now becomes whether the rebound in job growth will be enough to convince Fed officials to hold off on another round of stimulus. It will be a very tough call for the central bank next month because even though on paper, non-farm payrolls have improved, the unemployment rate remains very high (at 9.1 percent) and more importantly, the government’s broader U-6 unemployment rate rose to its highest level since December 2010. There is no question that the labor market is still very weak and the amount of job growth is not enough to offset the number of new entrants. One month of stronger job growth does not draw away from the fact that 3 out of the past 5 months, payrolls were less than 60k. Given that this is the latest non-farm payrolls report that the central bank will have on hand when they meet in November, they can either twiddle their thumbs for another month in hopes of seeing if job growth continues to rebound or they can jump the gun like the Bank of England because more QE is inevitable. The unemployment rate remained unchanged at 9.1 percent, average hourly earnings rose 0.2 percent and average weekly hours ticked up to 34.3 from 34.2. Although the manufacturing sector continued to experience net job losses, the U.S. is a service based economy and therefore the rise in job growth in the service sector completely overshadowed the manufacturing report.

There is little doubt that the U.S. economy still needs more help from the central bank and based upon recent comments from Bernanke, the Fed’s gun is locked and loaded. This week’s decision by the Bank of England to increase asset purchases could make the Fed’s decision to launch QE3 all that easier because the U.S. central bank would not be slapped with the stigma of being the first major central bank to revert back to Quantitative Easing. There is an old saying that everything comes in threes and despite today’s rebound in non-farm payrolls, a third round of QE is inevitable, although it may not be as large as the first or second round. More QE also does not mean an end for the U.S. dollar if other central banks are following along the same path. 

The labor market has long been the missing link in the U.S. recovery and as ambitious as President Obama’s jobs plan may be or the Federal Reserve’s commitment to jump starting the economy, none of it has been enough to make businesses more confident about hiring. Lack of working capital has not been the main reason why U.S. companies have shied away from adding workers. Instead, with sluggish growth, increased volatility in the financial markets and the uncertainty in the global economy, companies are saving their money for a rainy day and it will be the Fed’s job to encourage them to spend. 

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Comments (1)

Darkdoji

October 09, 2011 at 01:22 PM ET

Meaning What?

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.