The dollar was perched at multi-week highs on Friday, after notching up its biggest gains in about a month following robust jobs data that threw investors’ focus on to the strength of the U.S. recovery and the possibility of policy tightening.
The next test comes later in the day when U.S. non-farm payrolls data is published. The consensus forecast is for about 650,000 jobs to have been added in May, though the “whisper number” among traders is closer to 800,000.
Private payrolls data delivered a big beat with an increase of 978,000, against forecasts of 650,000, which sent the dollar rallying.
It rose 0.7% on the euro on Thursday and drifted another 0.1% higher through the Asia session to a fresh three-week high of $1.2110 per euro.
It sat by a two-month top against the Japanese yen at 110.32 yen per dollar and hung on to Thursday’s gains of more than 1% against the Aussie and the kiwi. [AUD/]
China’s yuan also softened past 6.4 per dollar, while other moves were very slight as markets now await the payrolls figures, due at 1230 GMT, with options trade showing it is expected to trigger volatility.
“Clearly traders are covering dollar shorts into the jobs data,” said Chris Weston, head of research at brokerage Pepperstone in Melbourne.
He thinks a million or more jobs might see the Aussie fall by another 1%, the euro drop about 0.8% and the dollar/yen exchange rate gain that amount as traders factor in a policy response to the strong economy.
“Between 250,000-500,000 jobs and we’ll potentially see dollar/yen fall 0.6% to 0.8%,” Weston said. “A number in line will not give us much to work with, so the moves in the market will be dictated by the broad quality of factors – revisions to the April print of 266,000, the unemployment rate, hourly earnings.”
At issue is whether the data points to the sort of hiring that could reel in pandemic job losses, lift wages and drive broad U.S. growth that increases the trade deficit and weighs on the dollar – or whether things feel like they are overheating.
Positioning data shows investors heavily short dollars, leaving the market hypersensitive to any suggestion of a change in direction for the currency or a shift in the rates outlook – hence the options market is priced for a bumpy ride.
Overnight implied dollar/yen volatility shot up to a month high above 8% on Thursday and euro/dollar implied volatility hit its highest since mid-March.
Brian Daingerfield, head of G10 currency strategy at Natwest, sees a payrolls print around 550,000 as the “goldilocks” number: “strong enough to keep the recovery going but not strong enough to pull tapering fears forward.”
That could weaken the dollar broadly, he said, offsetting Thursday’s moves, while bonds could recover lost ground. Benchmark ten-year U.S. Treasury yields rose 3.6 basis points to 1.6300% overnight and traded near that level in Tokyo on Friday.
The U.S. dollar index, which measures the greenback against a basket of six major currencies, rose 0.1% on Friday to a three-week high of 90.596 on Friday.
The Australian dollar was licking wounds at $0.7659, after falling to its lowest since mid-April overnight, while the kiwi was parked at $0.7151 after slipping to its cheapest since early May on Thursday.
Sterling was steady at $1.4091 after dropping through its 20-day moving average as the dollar climbed.
Cryptocurrencies took a knock from a string of Elon Musk tweets, but are tracking toward solid weekly gains. Bitcoin was last off nearly 6% at a little over $37,000.