A disappointing non-farm payroll report caught the forex market flatfooted. Forex is taking its lead from U.S. fixed-income yields. Many investors were looking for a healthy +185k print with an unemployment rate easing to +7.5%. They did in fact get a healthier jobless rate (+7.4%); however, it was heavily influenced by a lower participation rate. Many had been expecting U.S. 10-year yields to be making an assault on +2.75/80%, a rate that would have had USD/JPY making a strong case to test deep into the psychological ¥100 territory. Instead, U.S. 10s are making a case to revisit the +2.50/55% level first.
What investors got was a softer headline (+162k) in July, along with negative revisions to June (+188k from +195K) and May (+176k from +195k). The unemployment rate sank to +7.4%, having been expected to edge down to +7.5%. Average hourly earnings (+0.2%) edged down to +0.1%, while the workweek slipped to 34.4 hrs. (34.5 hrs.). All together, this has made for a soft report across the board.
Where to go from here? Many will expect emerging market currencies to get some sort of reprieve in the short term at least. Some EM currencies, like the BRL and MXN, jumped to a session high against the dollar. There is a strong case for investors to take advantage of the already cheap levels in many of these EM currency buckets. Some investors will take today's job report to mean that the Fed may not be in a hurry to draw down its stimulus in the short term. By default, it should provide more support for these currencies. However, for further U.S. yield and dollar losses, investors will have to hear from the Fed that a September taper is no longer in the cards.