Dollar Posts New Leg Up on Favorable Employment Report

US employment data came out on the strong side of expectations. The economy grew a net 195k June and the back to months saw a combined 70k upward revision. In addition, the increase in hourly earnings of 0.4% will underpin expectations for an increase in both income and consumption. It also creates the impression that the US economy finished Q2 with some momentum with bodes well for Q3 GDP.

The jobs data will strengthen expectations of tapering Fed asset purchases, but we still think the talk of a move later this month is pre-mature. US yields are rising sharply in the aftermath of the jobs report, with the 10-year yield up around 15 bp to 2.65%. Looking at the Fed funds and Eurodollar futures curve, the market perceives an increased likelihood of a late 2014 hike in the Fed funds rate, which is completely discounted by early 2015.

This, of course, stands in stark contrast with the signals sent yesterday by the BOE and ECB. In addition, the BOJ continues to be committed to its QE, which is only three months old this week. This is resulting divergence between the Fed and other major countries is helping underpin the dollar.

The euro has fallen through the trend line, which we have been anticipating. It came in near $1.2850. The next immediate target is near $1.2750. Sterling has fell through $1.50 in the European morning and now has been pushed through the $1.49 level. The March 12 low near $1.4830 is the next target. The dollar has been lifted above JPY101.00 in response to the stronger than expected US jobs data. The next target is near JPY101.80.

Canada reported less favorable employment data. There was a small net job loss of 0.4k, but this masked a deeper correction to May's out-sized jobs growth (95k). There was a 32.4k loss of full time jobs, or nearly half 76.7k increase in May. This volatility is uncommon and likely represents a bit of a statistical quirk. The Canadian dollar succumbed to the pressure of the divergent news and the greenback rose to new highs for the year, just above CAD1.06.

Emerging market currencies have sold off in the wake of the high Treasury yields. European shares are under pressure, but US equities appear poised to shrug off the higher yields and are called to open sharply higher.