Trading conditions were inevitably very subdued ahead of the US non-farm payroll report on Friday given its importance for Fed tapering and overall currency-market trends.
Following dovish ECB comments on Thursday, the Euro maintained a generally soft tone and dipped towards the 1.3100 support area ahead of the New York open. USD/JPY maintained a firm tone, but was unable to break above the 100 level and consolidated slightly weaker. Markets were generally optimistic surrounding the US release following a run of strong data over the past few days, especially after Thursday’s ISM survey.
In the event, there was a weaker than expected report with a headline non-farm employment increase of 169,000 for August compared with an expected 180,000. The damage from the headline could have been contained, but there was also a substantial downward revision to July’s figure at 104,000 from 162,000 previously. There was a decline in the unemployment rate to 7.3% from 7.4% which provided some relief as underlying earnings increased.
Markets were positioned for a strong figure which inevitably caused some immediate dollar damage. July’s downward revision was especially disappointing and there was a sharp decline in US bond yields. Inevitably, there was speculation that the Federal Reserve may not sanction any tapering this month. There is also a much-increased risk that the Fed will announce only a nominal tapering at the FOMC meeting.
The dollar fell sharply as EUR/USD was able to rally to the 1.3180 area before stabilising while USD/JPY moved to below 99.0 and USD/CHF dipped below 0.94. There were also fresh tensions surrounding Syria during the G20 Summit in St Petersburg which triggered some defensive yen demand.
The Canadian labour-market data was much stronger than expected with an employment increase of close to 60,000 for August following a decline of close to 40,000 the previous month while the PMI index managed to move back above the 50 level. There was improved sentiment towards the Canadian economy and, with the US currency generally weaker, USD/CAD fell sharply to lows below the 1.04 level.
The UK industrial data was broadly in line with expectations, but there was a significant deterioration in the trade-account data as the headline deficit increased to £9.9bn for July from a revised £8.2bn previously. The data raised fresh doubts surrounding the underlying economic performance as non-EU exports fell sharply. GBP/USD retreated towards the 1.5550 level before strengthening sharply following the US payroll data with EUR/GBP support below 0.84.