Dollar Rally a Reaction to NFPs or a Consequence of EU Crisis Fears?

• Euro Plunges to a Four Year Low Against the Dollar, Record Versus Franc as Hungry Talks Default
• Canadian Employment Strong and Stable but Not Immediately Market Moving
• British Pound Jostled by Exogenous Fundamental Drivers, BoE Due Next Week
• Japanese Yen Finds Strength in Carry Repatriation, New Prime Minister

Dollar Rally a Reaction to NFPs or a Consequence of EU Crisis Fears?
The US dollar jumped the gun Friday morning. Or perhaps it was the euro that moved too early. Heading into the morning release of US nonfarm payrolls for May, we were presented with the perfect scenario. A technical pattern that found EURUSD working its way into a terminal congestion pattern stationed just above the midpoint of the pair’s historical range offered the necessary build up. For the catalyst, the countdown had begun to a potentially historic release from one of the investment world’s most renowned market movers. Given the extreme level of the official consensus forecast, a reaction was all but guaranteed for the greenback. However, in the lead up to such an established event risk, liquidity would thin out as seasoned traders looked to avoid taking an early position that would ultimately move against them. As fate would have it, this particular condition would contribute to an unusual conclusion to what seemed a fated outcome for the currency. Little more than an hour before the official release of the US NFPs, news would hit the wires that another European economy had fallen on hard times. This time around, it was an Eastern European nation that has been off the radar for more than a year: Hungary. If was simply a bulletin that the nation’s sovereign credit rating was downgraded or austerity measures were held up; it would have been easily absorbed by the euro and the markets would have moved on to the impending US release. Instead, the Hungarian government itself would sound the alarm for a potential default; which in turn revived concerns over the stability of the European Union and thereby trigger another tumble in risk appetite. This particular move would prove particularly meaningful. In the confusion, the Dow Jones Industrial Average plunged more than 300 points (three percent) to close below 10,000 and EURUSD would drop below its lifetime 50 percent retracement at 1.2135 and eventually slip below 1.20.

Does a Hungarian default necessarily carry that much risk for the European Union – much less the global financial markets? It is difficult to say. There is little doubt that the unusual trading conditions that defined the market during its release contributed to price action significantly. If indeed this was a minor catalyst leveraged into momentous breakout, we could see this week-end move ultimately stall and reverse. Whether that is the case or not, will depend on what details we are offered on the situation next week. On the other hand, even if fears over the EU are curbed, we could still see risk appetite permanently affected by today’s NFPs. Somewhat lost in the fray, the top event risk would end up offering considerable surprises to work with. With the official consensus already setting the bar high with a 537,000 net increase in payrolls and a downtick in the unemployment rate, the market was ready for a remarkable reading. Not surprising, the headline indicator would fall short of posting its biggest net increase in 27 years; but the 431,000 jump was nevertheless the biggest since September of 2000. For a positive bent, the jobless rate actually slipped to 9.7 percent, besting expectations. If this were the extent of the data, we would have had a good report overall. However, after six months of bearish markets and financial uncertainties, investors have grown a little more critical of supposed improvements. Upon closer inspection, the details show that private payrolls fell far short of the 180,000 jobs increase expected with a moderate 41,000 positions added. This means that the impact of the temporary addition of census workers was even greater than was initially expected. Furthermore, the shift in the jobless rate can be attributed to the influence of temporary workers and/or American’s leaving the workforce. Given this objective review of the data, the it comes as little surprise that the dollar maintained its decline through the day.

Euro Plunges to a Four Year Low Against the Dollar, Record Versus Franc as Hungry Talks Default
The euro was already barely holding itself together heading into the end of the week with risk appetite barely scraping up enough optimism to keep this fundamental weight afloat. For the shared currency itself, the second reading of first quarter Eurozone GDP offered little to work with. The headline quarterly reading held at a 0.2 percent bearing of growth while the annual figure accelerated slightly to 0.6 percent – the best pace in nearly two years. Essentially this data would be considered a write off as most of the individual economy growth figures had already been accounted for. What traders were really interested at the beginning of the session was the potential outcome of the US employment report. A significant move for the greenback would lead to the inverse for the euro as the two represent each others’ primary counterpart. However, before this data would hit; the euro itself was thrown for a loop with surprisingly candid remarks from Hungary’s government. Hinting at a default is not appropriate, especially when the region is avoiding such an occurrence at all costs. Now we wait to see how this plays out. No doubt, EU leaders and other heads of state will have strong worlds for Hungarian officials. A backtrack however may not sooth the beast.

Canadian Employment Strong and Stable but Not Immediately Market Moving
All together, the Canadian economic docket was impressive. Though the unemployment rate would hold off from setting a 15-month low with a repeat 8.1 percent reading, national payrolls rose a greater than expected 24,700 positions for the fifth consecutive monthly increase. This is a perfect complement to Monday’s decade-high pace of annualized growth and a credible sign that the world’s eighth largest economy is in fact at the top of the fundamental list. Adding to the good news, the Ivey PMI reading for the same month rose to its highest level since July of 2008. This would have been a clear platform for strength for the loonie had sentiment not fallen apart following the Hungary news.

British Pound Jostled by Exogenous Fundamental Drivers, BoE Due Next Week
There was little escaping the fundamental pull of the EU’s troubles for sterling traders. Another catalyst to send the region stumbling heightens the fear of sovereign default for all those economies under watch. For scheduled event risk, a Halifax report showed home prices rose 5.3 percent from a year ago – the fastest pace of expansion since October 2007. This indicator, however, holds little clout. Next week’s BoE decision is a different case. While the benchmark rate is unlikely to change, the statement that follows could offer cues for forecasts.

Japanese Yen Finds Strength in Carry Repatriation, New Prime Minister
Early in the Asian session Friday, the Japanese yen was edging lower on news that Naoto Kan was appointed Prime Minster of Japan. His remarks to the media pointed to an approach that would simply pick up where his predecessor left off – passing the disappointing torch of economic recovery and fiscal repair. However, when it comes to risk appetite, the yen will also fall back on strong carry flows.

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