Over the last month the markets have barely batted an eyelid in response to what are usually considered to be market moving US economic data. Reaction to Friday’s US employment report is a case in point. The non-farm sector far exceeded expectations adding 288,000 jobs for the month, the most since June 2010 and the second biggest monthly gain in around 10 years. In addition the headline unemployment rate reached 6.3 per cent for the first time since October 2008.
One would expect such news to have a big impact on currency markets. After all employment is supposed to be the driving force behind economic growth and if the US is adding jobs at a faster rate than previously thought then surely economic growth will follow. Instead the Greenback strength against the Aussie dollar, as is evident on the 15 minute chart below, lasted the whole sum of 2 hours. That’s right - the USD jumped from 0.9265 to 0.9201 within minutes but then reversed the move to be back at 0.9275 only two hours later.
So why did traders not follow through and continue to buy the USD? There are a couple of reasons I can put my finger on but the crux of the matter is that, in traders’ minds, US jobs data is irrelevant at the moment. Many are focusing on the fact that the participation rate is not climbing and still remains at 36-year lows.
But more to the point is that the link between increasing jobs growth and economic growth is unconvincing at the moment. Even though the unemployment rate in the US peaked at 10.2 per cent in late 2009 and has dropped significantly to 6.3 per cent, GDP remains stubbornly low. Last week the Fed seemed resigned to lowering growth expectations without specifically lowering their targets and I get the sense there is more to come on this front.
So what does matter? It seems that for the time being, markets have given up trying to interpret the economic data impact on interest rates. Given the Fed has anchored expectations on the possibility of rising interest rates (to the second half of 2015 or later), positive economic data that previously moved the currency is not likely to have a positive impact on the US dollar.
This may not change until the Fed signals a change in the outlook for interest rates. So to this extent what does matter is what the Fed says going forward and I suspect they are in no hurry to talk the dollar up.
Jim Vrondas is Chief Currency strategist, Asia-Pacific at OzForex, a global provider of online international payment services and a key provider of Forex news. OzForex Group Limited, is a publicly listed entity with shares traded on the Australian Securities Exchange under the code "OFX".