Kiss June Fed Hike Not Dollar Goodbye

You can kiss the chance of a June Federal Reserve rate hike goodbye after today's non-farm payrolls report. The U.S. economy added the fewest jobs in 7 months, leaving the unemployment rate at 5%. Investors had been hoping for the jobless rate to improve and payrolls to fall modestly but the 40K miss and the downward revision to last month's report completely overshadowed steady earnings growth. Earnings are important but in order for the dollar to rise, we needed to see an unambiguously positive labor market report and unfortunately that did not happen. At the same time, while the chance of a June rate hike collapsed, the dollar did not because the NFP report was released in an environment of dollar strength and most investors were positioned for a weak number.

Can the dollar still rise in the coming week? Yes because the steady 0.3% increase in earnings and the uptick in year over year wage growth provides hope that retail sales, which fell sharply in March will rebound strongly in April. However after this week's strong gains, particularly against the commodity currencies, some type of a correction in the greenback would not be unusual. Either way, we still view 107.50-108 is an attractive area to sell USD/JPY.

After some initial post NFP volatility, euro traded slightly higher versus the U.S. dollar. Eurozone first quarter GDP numbers are scheduled for release next week, but the market's appetite for U.S. dollars will continue to have a meaningful impact on EUR/USD. GDP growth is expected to accelerate but given the sharp drop in German retail sales, we believe the risk is to the downside for Friday's report. Earlier in the week, we have German industrial production and trade numbers scheduled for release.

Meanwhile USD/CAD hit a fresh monthly high on the back of weak employment numbers. Although the unemployment rate held steady at 7.1%, more than 2k jobs were lost in the month of April after the strong gain in March. The pullback is not surprising but USD/CAD's quick run above 1.2900 gave traders on the sidelines a stronger reason to buy USD/CAD. Manufacturing activity grew at a slightly faster pace which is at odds with the deterioration in labor market conditions and the record breaking trade deficit but we're still looking for move to 1.3000.

Commodity currencies will remain in focus at the start of the week with the Sat/Sun release of Chinese trade numbers. The Australian dollar was hit hard after the Reserve Bank cut its inflation forecast by a whole percentage point and downgraded its assessment of the economy. This move not only explains the central bank's decision to cut interest rates in May but also fueled speculation of more easing. Low inflation is a significant issue for the Reserve Bank and raises concerns that they won't be able to meet their budget deficit reduction goals. Yesterday Moody's warned that the government's growth forecasts are too optimistic and while the central bank did not alter its GDP estimates, the recent deterioration in Chinese PMIs signals ongoing weakness for the country's largest trading partner. Chinese trade numbers will have a significant impact on the outlook for Australia and the performance of AUD/USD next week. Although AUD dropped 4 cents off its high, now that the 38.2% Fib retracement of this year's move at 0.7450 has been breached, we are looking for a deeper slide to 73 cents.

The New Zealand dollar fell in sympathy with AUD this week. Low inflation is also a problem for New Zealand and the latest developments increases the pressure on the RBNZ to take fresh action. NZD should follow AUD lower and a break below the 50-day SMA at 68 cents opens the door to a deeper slide towards 66 cents. The only piece of data scheduled for release from New Zealand next week is retail sales on Thursday but the Reserve Bank will share its Financial Stability Report on Tuesday afternoon NY time (Wednesday AM local).

The resilience of the British pound continues to astound us. Despite back to back weakness in the manufacturing, construction and services sector PMI reports, we've seen only limited losses in the currency.The only reasonable explanation is positioning - speculators are already holding massive short positions according to the CFTC ahead of the E.U. referendum and they are waiting for political and not economic validation to add to their current exposures. However GBP/USD may not be able to ignore fundamentals for much longer if the latest economic reports renew concerns for the Bank of England. A dovish central bank could drive GBP/USD below 1.4400.