Non-Farm Payrolls and The Path of The US Dollar

Market Analysis /
02 Nov 2018

With the key US Non-Farm Payrolls (NFP) event fast approaching, lets have a look at a few current themes in the FX market as well as some possible trading scenarios around this important economic release.

The current state of play in currency markets shows that the US Dollar (USD) has been the dominant performer, largely based on expectations of higher US interest rates going forward. Therefore, if we do see a strong print on the US NFP report, this would appear to cement this theme and allow for further gains in the USD, albeit that these gains may be more of an incremental nature given the great strides already made by the greenback. This is evidenced by the US Dollar Index hovering around 16-month highs, whilst the Euro and Yen both lost over 2% against the USD in October alone.

With so much USD strength already ‘baked into the cake’ at this point, a case could be made that the biggest NFP-related moves could stem from any downside surprises in the jobs data. A weak jobs number may force a repricing of the interest rate cycle, leading to an unwinding of the long USD positions which have dominated the market in recent months.

The EURUSD rate has been under the pump and is trading near its yearly lows of 1.13, but any unwinding of USD longs in the case of a soft NFP print could see the single currency have a bounce back towards the 1.1450 resistance area. But whether such a bounce could be maintained is another matter, given the sluggishness of Eurozone data of late.

Another currency which has room to move on the upside (should we see soft US employment numbers) is the Australian Dollar (AUD). With traders not liking the idea of higher US interest rates, a tame US jobs number may be a welcome sight in many quarters, on hopes that it may slow down the Federal Reserve’s rate hike cycle. With the AUD being one of the market’s best risk-barometers, if a downside miss on US jobs is cheered by investors, then the Aussie Dollar could potentially have a run back up towards resistance at 0.7160. Though much will depend upon the reaction of commodity and equity prices.

On the flip-side, what should we expect if the US NFP data beats expectations?

While it’s not always a reliable guide, the US ADP (private employment) numbers released on Wednesday (US time) came in at 227k, well above the 189k forecast. If the NFP data produces a similar number, this would be above the 6-month average of 203k and would be a sign that the labour market remains in full swing, with forthcoming rate increases being well justified. A strong, expectation-beating NFP print would allow the USD to build on recent gains and post fresh highs against its major counterparts. As such, if the USD does get a further boost from the jobs data as part of a yield play, this could open the door to the downside for the Euro with a potential move towards the mid to low 1.12 region on the radar.

Furthermore, a solid NFP print of above 200k would highlight the divergent growth story that exists between the US and Europe, which would pave the way for further USD momentum in the short term. However, because the USD has already appreciated strongly based on bets of higher interest rates, the largest currency moves would arguably occur in the event of a significant downside miss on the US jobs data. So as usual, trying to predict the NFP result is a guessing game. The only certain thing is that the FOMC (Federal Open Markets Committee) will be watching the employment data closer than anyone, with a view towards framing future US Monetary Policy for the remainder of 2018 and into 2019.

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