The US dollar traded higher before the weekend with the help a fairly robust jobs report. Although the jobs growth itself was somewhat disappointing, the details were constructive: More people working a longer work week and earning more. The participation rate rose, and the unemployment rate (U-3) fell. The Atlanta Fed GDPNow tracker increased to 2.2% in Q1 16 from 1.2% at the start of the week. 

Despite the pre-weekend gains, the greenback lost ground against all the major currencies last week. We had anticipated a stronger showing for the dollar following the BOJ surprise rate cut and the ECB’s reassessment of its monetary policy next month. The market has jumped from the China-driver to oil and now to the risks of a US recession. We did not anticipate the rise of this fear outside of a few who have been pessimistic throughout the entire expansion cycle. 

Neither the US jobs data nor the prospects for a stronger economic recovery in Q1 will persuade the cynics that the US is not recession-bound. Here the tightening of the financial conditions are important, and NY Fed President Dudley cited this in a recent speech. The Survey of Senior Loan Officers showed a tightening of lending conditions and weaker demand for the second consecutive quarter.

This means that real sector data, like the jobs report, but also next week’s retail sales, to push back against the recession talk. While next FOMC meeting is five weeks away, it is difficult to see the pendulum of expectations swinging back in favor of a March hike.

From a technical perspective, the dollar’s pullback has been largely corrective in nature. Leaving aside the yen, against the other major currencies, the dollar is correcting a run-up that began in mid-October. The chief exception is sterling, which arguably is retracing the move that began in December. This is not to say there has not been a fundamental development. We do recognize that interest rate differentials have narrowed as the market had nearly priced out any rate hike by the Fed this year. We continue to expect that the Obama dollar rally has more life in it, and overtime the negative rates in Europe and Japan will encourage the demand for dollars and dollar-denominated assets.