TheMarketTone.com

There is no question that the US labor market is deteriorating. Non-farm payrolls fell by -84k last month, driving the unemployment rate to a 5 yeer high of 6.1 percent. However what made FX traders really sell the dollar was the jump in the unemployment rate and the revisions. The US government said that 9k more jobs were lost in August than previously expected and 38k more jobs was lost in June. Even though we did not get the -100k print that we had expected last month, the US economy did lose 100k jobs in June. Since the beginning of the year a total of 605k jobs have been cut. We expect at least another 2 or 3 months of negative job growth before the labor market hits a bottom.

Over the past 30 years, the US economy has gone through 3 recessions and in each of those 3 recessions, there was a string of job losses that lasted for a minimum of 11 months.

This has triggered a sharp sell-off in the US dollar, driving USD/JPY towards our target of 105. The biggest weakness in the US dollar should be against the Japanese Yen. Against the Euro and British pound, this could be a temporary correction. Oil continues to trend lower while the financial markets are trading off risk aversion. The dollar is still benefitting flight to safety.

Weaker economic data has not stopped the dollar from rallying in the past. On a purchasing parity basis, the US dollar is still undervalued against the Euro and British pound. With the markets waiting for the Federal Reserve to deliver their first rate hike in 2 years and the European Central Bank to cut interest rates for the first time in 5 years, the expectations for completely diametric monetary policy is exactly what could drive the EUR/USD to 1.40 over the next few months or even weeks.