The U.S. Dollar Red Line Is April Nonfarm Payrolls Of 205K

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Summary

U.S. dollar index has been falling off the cliff.

The strengthening Japanese yen and gold prices have put selling pressures on the U.S. dollar.

USD/JPY and EUR/USD currency pairs are threatening to break current levels if the U.S. labor market shows signs of weakening.

DXY is at risk of another major move to the downside.

The U.S. dollar index, or DXY, a weighted index of the value of the U.S. dollar relative to a basket of six major currencies, has been falling off the cliff since the Bank of Japan, or BOJ, said in late January that they would introduce quantitative and qualitative monetary easing and apply a negative 0.1% interest rate on excess reserves, or IOER, of financial institutions placed at the bank. The move by the BOJ triggered the unwinding of carry trades as FX currency traders became bearish on the USD/JPY. The recent decisions by the Federal Reserve not to raise the key interest rate and by the BOJ to keep its monetary policy on hold have sent the U.S. dollar and USD/JPY tumbling to a 15-month and 18-month low, respectively.

DXY Technical Chart

The DXY is now bumping into technical support at 92.33, after slew of weak U.S. economic data were announced, including the advance estimate gross domestic product, or GDP, for the first-quarter 2016 by the Commerce Department on Thursday that showed a tepid increase at an annual rate of 0.5%, the slowest since the first-quarter of 2014.

Some Fed officials, such as Federal Reserve Bank of Atlanta President Dennis Lockhart, believe that the U.S. economy is likely to rebound and inflation to firm, as the overall employment picture is still rosy with an unemployment rate of 5.0%. Nonetheless, any sign of weakness in the labor market could put the U.S. dollar index at risk of another major move to the downside. The next support for the DXY is at 89.49, or 38.2% Fibonacci retracement level.

U.S. Economic Outlook Not so Rosy as Layoffs Mount

The Fed may be caught between a rock and a hard place because job growth is decelerating while inflation is going nowhere. According to the Department of Labor, U.S. nonfarm payrolls has declined steadily from 295,000 jobs added in October 2015 to 215,000 added in March 2016, while hourly wages inched up a mere 0.75% from $21.21 per hour to $21.37 per hour during the same period. Core personal consumption expenditures, or PCE, excluding food and energy, climbed from 109.86 in October 2015 to 110.655 in March 2016, a 0.72% increase, in line with the gain in hourly wages.

The Commerce Department said last week that consumer spending in March edged up just 0.1%, while February spending was revised upward from a 0.1% increase to a 0.2% gain. The data suggested that U.S. consumers aren't spending as much as most economists expected. The Federal Reserve Bank of Atlanta is forecasting the second-quarter 2016 GDP at 1.8%, compared to 3.9% growth in the same quarter last year.

The U.S. service sector, accounting for nearly 80% of the private sector GDP, seems to have gained some ground in April, according to Markit's final reading of the services purchasing manager's index, or PMI, but the rate of employment growth was the weakest seen since December 2015. Here is what Chris Williamson, Markit's chief economist had to say,

The drop in confidence seen so far this year is beginning to hit the labour market, with the survey signaling 160,000 extra jobs being created in April, down from an average of 200,000 in the first three months of the year.

Layoffs are mounting but have not made headline news during this election year, as companies are under margin pressure due to slower demand. According to global outplacement consultant Challenger, Gray & Christmas, Inc., through the first-quarter of 2016, employers announced 184,920 job cuts, up 31.8% from the 140,241 during the same period of 2015. The hardest hit is the energy sector, where employers announced 52,901 job cuts in the first three months of 2016, followed by the retail sector with 31,832 job cuts. The Department of Labor will release its April nonfarm payrolls data on Friday, with expectations of a 205,000 jobs gain.

Strengthening Japanese Yen and Gold Price Put Selling Pressures on the U.S. Dollar

Concerns about weakening global economies and the BOJ's negative interest rate policy have put buying pressures on the Japanese yen as a safe-haven currency and hedge. The yen, 13.6% weight in the U.S. dollar index, continues to strengthen despite the possibility that Japan's economy could fall back into recession. The Cabinet Office of Japan said in early March that Japan's GDP shrank an annualized 1.1% in the fourth-quarter 2015, considering that weakness persists in private consumption, which accounts for about 60% of the economy.

USD/JPY Technical Chart

The USD/JPY turned bearish after the currency pair was unable to break out the descending wedge chart pattern in early December. To make matters worse, the gold price is rising along with the Japanese yen as the global outlook worsens, putting more selling pressure on the U.S. dollar. The currency pair is now threatening to break below 106.63 yen per dollar, or the 61.8% Fibonacci retracement level. If the Japanese government doesn't intervene, the next support levels are 105 and 102 yen per dollar, respectively. In early April, Japan's Prime Minister Abe said he ruled out intervening in the currency markets to halt a surge in the yen.

JPY/USD & Gold Charts

EUR/USD Will Break Out the 1.15 Level if Nonfarm Payrolls Comes in Weaker Than Expected

The euro, 56.7% weight in the DXY, has been strengthening against the U.S. dollar, despite that the European Central Bank, or ECB, announced in March that they raised monthly asset buys to 80 billion euros, from 60 billion euros, and cut its main refinancing rate to zero from 0.05%. The above-expectations QE came with a negative spin though, as ECB President Mario Draghi said after the monetary policy meeting that the central bank doesn't anticipate that it will be necessary to reduce rates further.

EUR/USD Technical Chart

The ECB's aggressive stimulus plan might be beginning to show some results. The Markit composite PMI for April indicated continuing expansion in the eurozone economy, but retail sales fell sharply in March after rising modestly for the fourth straight month in February, according to the European Union's statistics agency. The EUR/USD is trading near the 1.15 euro per dollar level and is about to make a major breakout to the upside, if the U.S. labor market shows signs of weakening.

Conclusions

The U.S. dollar index, or DXY, has been falling off the cliff with recent decisions by the Federal Reserve not to raise interest rates and by the BOJ to keep its monetary policy on hold have sent the U.S. dollar and USD/JPY tumbling. U.S. economic and jobs data, along with the strengthening Japanese yen and gold prices, have put selling pressures on the U.S. dollar as the U.S. and global outlook worsens.

The U.S. dollar index is at risk of another major move to the downside as the USD/JPY currency pair is now threatening to break below current levels and the EUR/USD is about to make a major breakout to the upside if the U.S. labor market shows signs of weakening.

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