US jobs power up soaring dollar

The US September payrolls showed a net increase of 248,000, a total upward revision of 69,000 in the prior two months and a decline in the unemployment rate to a 5.9%, the lowest since July 2008. The rare combination of a decline in the jobless rate and an upside surprise in employment creation is further contributing to the explosive rally of the US dollar. The report not only confirms that the Federal Reserve will end is quantitative easing later this month, but also revises expectations that it could raise interest rates as early as summer 2015 rather than autumn 2014.

The US dollar has now dragged the GBPUSD rate below $1.60 for the first time since November, while gold has broken below $1200/oz for the first time since December. The US dollar index rose for the 12th straight consecutive week, the longest series weekly advances since the index was created in 1971.

The decline in the participation rate to a fresh 36-year low of 62.7% continues to raise the question about the breadth of labour market improvement, but when non-farm payrolls have risen by more than 200K in seven out of the last eight months, this will be defined as a notable improvement, even in the books of the most dovish of central bankers.

USD rally: from robust to fierce

We said two weeks ago on here the dollar rally shows characteristics not seen since 2005 as it is accompanied by advances against the Japanese yen, which is unlike any of the USDX advances of the past six years. Aside from domestic strength in the US as well as the windfall of falling oil prices on the US economy, the ensuing negatives abroad will keep the greenback standing tall.

Outside the US, the factors aiding the USD are more than enough; the UK’s political uncertainty ahead of the May elections and the lingering risk of a “No” from the EU; Japan’s planned rebalancing of pension portfolios to include more foreign stocks, Eurozone’s dependence on a weak euro to fight off the threat of disinflation regardless of how many ABS and covered bonds the ECB buys; Switzerland’s ongoing threat to enter negative interest rates as long as EURCHF is under pressure are all the factors for the Fed to consider when removing the punch from the party.