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Why Non-Farm made a collapse of the dollar by 100 points on Friday, June 2


Non-Farm Payrolls diverged from preliminary data from ADP

The dollar, gaining a positive mood for the week, suffered a total fiasco on Friday after the Non-Farm’s data publication: 

The miserable 138K increase compared to the forecast of 182K pulled USDJPY by more than a pattern!

The main reason for this movement was “insidious disappointment” for those who have already set their mind on the market positive attitude: before, the unofficial ADP’s forecast hinted at an impressive increase in “Payrolls”, is it a joke by 253K (the fact of NFP was the only 138K). In addition, distrust and published dynamics of earnings growth are also impressing: the Earnings growth is rather mediocre, at the forecast level (0.2%), while the previous Average Hourly Earnings release was revised for decrease up to 0.2% against 0.3%.

Also, an additional optimism gained before the NFP was the popular Manufacturing ISM® Report On Business® dated May 2017, the employment component of which showed an increase of +1.5 points.

As a result, NFP not only failed to support the positive mood but also significantly reduced them. That's all happened on the eve of the FOMC meeting, at which the FRS should raise its interest rate!

Now all the attention for the USD is focused on June 14, at the FRS FOMC meeting: the markets laid about 90% of chance for another FRS’s rate increase in two weeks.

The head, Janet Yellen, changed the method of decision-making on the rate; the Committee will not take into account subsequent events and news. Before the meeting, two weeks of silence will be announced. At the same time, weak labor market data can cool the desire for the currently anticipated increase in the rate. It is worthwhile to follow closely the quotes of Monday, which may reflect a decline in the same 90% of chance of Friday.

Meanwhile, the representatives of the Federal Reserve said:

FOMC member, Jerome Powell, speaking on Thursday, voiced the FRS’s decision on two future rate increases in the second half of the year with a “balanced” state of affairs in the economy.

Williams (doesn’t vote in the FOMC, an FRS’s member) sees three rate increases this year (that is, plus two), and its gradual increase will prevent overheating of the economy. 

Kaplan supports two additional rate increases this year.


Speculations around the ECB’s monetary policy tightening are exacerbated and it’s not for nothing...

In the medium term, the euro's growth may continue due to the ECB's actions aimed at curtailing monetary incentive, which many developed countries of the Eurozone (and especially from the Bundesbank) call Mario Draghi for.

The European Union’s GDP is growing 16 quarters in succession, any hint of changes in the ECB policy puts the FRS’s incentives “on the back burner”, noting them only as short-term jumps in the rate. 

Mario Draghi himself notes that economic prospects are increasing and risks are being reduced, but at the same time, he remains convinced of the need to support monetary policy but does not deny the possibility of further correction. Draghi also noted that the ECB can formulate conclusions on the distribution of risks and probable growth and inflation prospects in June (the ECB meeting is already near at hand, it will be held on Thursday, June 8).


More likely, the RBA will continue to maintain neutrality

Quite good statistics continue to come from Oceania: Australia's retail sales increased significantly (1% in April compared to a decline of -0.2% in March). Also, surveys were published, according to which the change of the interest rate from the Reserve Bank of Australia is not expected.

Neighboring New Zealand in the Financial Stability Report notes a reduction in risks, which, together with the rest of the statistics, may indicate a continuation of the neutral monetary views of the Central Banks of Oceania.


Sterling will remain under political pressure until June 8

It is on this day that early parliamentary elections will be held, and this is the upcoming Thursday (June 8). In the meantime, the markets are savoring the results of polls, according to which the risks to the GBP’s stability escalated closer to the elections. If firstly Teresa May was in the lead in the polls as a winner, she had only a slight edge closer to the weekend.

Theresa May’s Conservative party cannot boast a wide margin (only 3%) from the competitors. In the event of a defeat, the pound, which started its recovery so well this year, is waiting for new lows. Against this background, any economic news on the British currency will have a short-term value. 

It is worth remaining extremely attentive and cautious until the announcement of the results.

Important events of the upcoming week (June 5-11)

Next week, the main event will be early elections in the UK as well as the European Central Bank’s meeting.

On Monday, pay attention to the UK Services PMI and US ISM Non-Manufacturing PMI publications.

The Bank of Australia, at a meeting on Tuesday, will decide on the interest rate, which, according to analysts' expectations, will remain unchanged at 1.5%. It should be recalled that the inflation data is 2.1% and grow three-quarters in succession, the regulator continues to hold rates at low levels since the end of last year, but the Regulator relies on the expectation of the GDP fall. The data on it will be published the next day after the meeting.

Indeed, the quarterly data of Australia's GDP published on Wednesday may be much more interesting. This indicator is now well met by traders.

The moment of truth, how much the Eurozone bankers influenced Mario Draghi, will be the ECB's meeting on Thursday. It is worthwhile to take care of yourself on this day, and due to the parliamentary elections in Great Britain, they will finally take place, and after that, political tension will grow into true attention to economic indicators.

The new week also prepared a surprise in the form of a Canadian labor market report (local Non-farm), which this month will be released separately from the USA statistics (which will allow trading it, too). The data will be published on Friday

A full calendar of important trading events is as always on the spot.