One of the most important pieces of data this week was November nonfarm payrolls. The softer release should have sent the U.S. dollar tumbling lower but instead the greenback ended the day sharply higher against most of the major currencies. This same strength can be seen in stocks, which soared to record highs.
So why are investors buying the dollar and stocks on a lackluster jobs report? The answer is simple.
Everyone knows that this latest pandemic wave hit the U.S. economy hard but with local governments crafting plans for vaccine distribution and Congress working towards a new stimulus deal before the end of the year, investors see pent up demand as 2021’s primary source of recovery. Even Federal Reserve officials agree that while the surge in virus cases makes the outlook “extraordinarily uncertain” according to Fed Chair Jerome Powell, vaccine development makes him “very positive” for the medium term. The pandemic is deepening, but the record-breaking moves in stocks tell us that investors are unambiguously optimistic.
With that said, U.S. companies added only 245,000 jobs in the last month, down from 610,000 in November. This was significantly less than the 468,000 consensus forecast but the improvement in the unemployment rate and increase in average hourly earnings were bright spots. New restrictions should have caused more job losses and fewer additions in late November-December but how the market reacts to revisions or next month’s report depends on where we are at with vaccine development and distribution.
In the near term, unless there are serious setbacks, investors continue to shrug off weaker data. Next week the focus shifts away from the U.S. dollar to the euro. With only CPI and the University of Michigan index on the calendar, the European Central Bank monetary policy announcement will dominate. The ECB is widely expected to ease monetary policy and lower economic projections. However, instead of falling in anticipation, the euro climbed to its strongest level in 2.5 years this week. Europe is a few weeks ahead of the U.S. in its coronavirus battle with some countries like France and Spain starting to see their curves flatten. By easing in December, these improvements could give the ECB the peace of mind to see if the region recovers before considering more stimulus. In other words, there could be more U.S. stimulus before another round of Eurozone stimulus in 2021.
The best performing currency on Friday was the Canadian dollar. Job growth slowed in the month of November but, unlike the U.S., there was a big upside surprise. Economists were looking for job growth to slow 20,000 from 83,000 but instead, Canadian companies added a whopping 62,000 jobs last month which pushed the unemployment rate down to 8.9% from 8.5%. Canada is also struggling with record-breaking coronavirus cases, but a summer of stronger recovery paved the way for healthier job growth. The downside surprise in U.S. data combined with upside surprise in Canadian data drove USD/CAD to its lowest level since April 2018. The loonie remains in play next week with a Bank of Canada monetary policy announcement on the calendar. Today’s report reaffirms our outlook for no change in the BoC policy.
Sterling also hit a 2.5-year high on Friday before succumbing to a dollar recovery. Although better than expected construction sector PMI, declining new virus cases and plans to ease restrictions are all reasons for a rally, the primary catalyst is hope for an 11th hour Brexit deal. After failed agreements in London this week, Prime Minister Boris Johnson and European Commission President Ursula von der Leyen will speak directly on Saturday in what will be one of their final chances to make a deal before their year-end deadline.