Convenience Yield and Backwardation
Fundamental Analysis

Currency Futures Dip as Dollar Surges on Solid US Employment Data

  • Data revealed a big increase in US employment in March.
  • The chances of a Fed rate cut in June fell to 54.5%.
  • Over 2000 Canadians lost jobs in March.

Currency futures fell on Friday as the dollar rallied after the US reported a bigger-than-expected increase in employment in March. As a result, there was a higher chance the Fed would lag behind other major central banks in cutting interest rates. Despite the big rally on Friday, the dollar ended the week down. 

US employment (Source: Bureau of Labor Statistics)

US employment (Source: Bureau of Labor Statistics)

Data revealed a big increase in US employment in March. Moreover, there was a slide in unemployment rates that confirmed high demand in the labor market. This report had market participants rethinking the outlook for rate cuts in the US. 

A robust economy means the Fed can comfortably keep interest rates high. However, it also implies that inflation could spike if the central bank starts cutting interest rates too soon. Therefore, the Fed might hold rates for longer as inflation gradually declines. The chances of a rate cut in June fell to 54.5% after the report. 

This outlook might, however, change again when the US releases inflation data this week. Economists are expecting a decline from 0.4% to 0.3%. However, if inflation remains high, investors will scale back rate-cut bets. Furthermore, they might change the timing for the first cut to July. This would put the Fed behind a number of major central banks, including the Bank of Canada, the European Central Bank, and the Bank of England. 

Meanwhile, the Canadian dollar’s decline on Friday was magnified by a poor employment report. Over 2000 Canadians lost jobs in March, compared to expectations for an increase of 25,000 jobs. At the same time, the unemployment rate surged, showing a deteriorating labor market. This was the complete opposite of what happened in the US. 

After the report, traders raised bets that the Bank of Canada would start cutting interest rates in June. A weaker economy puts pressure on the central bank to cut rates and avoid a recession.

Similarly, the yen weakened as the dollar strengthened, raising alarm over a looming intervention. Experts believe Japanese authorities will intervene when the currency falls below $152. On Friday, Japan’s Finance Minister Suzuki warned of the need for action to curb currency declines. At the same time, BoJ governor Ueda said the central bank could use monetary policy to support the yen if necessary.