The Dollars Loses Luster After Weak Payrolls Report

The dollar lost ground on Friday on the heels of the Labor Departments release of a slightly worse than expected employment report, which allowed bond prices to rally, reducing yields across the interest rate spectrum.  The data eroded the value of the greenback, which saw interest rate differential move in favor of the yen and the Euro.  Although many believe that the data was strong enough that the Federal Reserve will initiate a tapering process after they meet to discuss interest rates in two weeks, the tapering will likely be very light, given the result of Friday’s report.

Ten year bond yields in the US tested resistance near a downward sloping trend line created from connecting the highs in April of 2010 with the highs in February of 2011, that comes in near 3%.  A stronger than expected report would have likely pushed yields through this psychological level, making owning the greenback more attractive.  Yields nearly immediately fell back to the 2.90% level following the non-farm payroll report, potentially testing support levels near the 2.75% region.

The rally in US bonds, sparked a globally rally in interest rate products, but the increase in US bond prices relative to its counterparts, drove the yield differential against the greenback.  Generally currency pair’s move in the direction of the differential has higher yields attract investors and make it more difficult to short a currency.  The US – Yen yield differential lost nearly 8 basis points in the 10-year space driving the dollar lower versus the Japanese currency.

The impetus for the move came as the Labor Department release their employment report which showed that non-farm payrolls increased by 169K compared to the 175K expected by economists.  The unemployment rate declined to 7.3%, but the labor participation rate, which reflects the number of people looking for jobs, declined to 63.2% from 63.4% the lowest rate in 35 years.  Revisions to June and July payrolls where negative, with the emphasis on lower government jobs creation during the prior two months.

The USD/JPY currency pair moved against the dollar moving down toward support level in a downward sloping trend line that initially signaled a breakout.  Support is also seen near the 10-day moving average near 98.71.  The relative strength index (RSI) turned lower and is now printing near 52, which is in the middle of the neutral range. Momentum has turned negative with the trajectory turning negative despite printing in positive territory.  The MACD is poised to generate sell signal if the spread (the 12-day moving average minus the 26-day moving average) can cross below the 9-day moving average of the spread.

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Contributed by Marcus from ExchangeCurrency.com, a site for comparing money transfer rates.