NFP Preview: December 2021

Highlights:

• This month´s NFP number is likely to exceed expectations, paving the way for an extension of the Dollar rally
• USD more likely to strengthen against risk-on currencies
• Sell-off in the Oil market makes USD/CAD particularly attractive
• If NFP data disappoints, look for a relief rally in stocks – albeit a short-lived one as Omicron continues to haunt markets

The US Dollar is benefiting from the current risk aversion as concerns surrounding the new Omicron coronavirus variant triggered a sudden demand for safe havens. Hawkish comments from Fed Chair Powell gave the Greenback an additional boost, and Dollar bulls are now keen to see if today´s U.S. employment data can pave the way for the next leg higher.

Why does this month's NFP release matter even more?

Powell recently opened the door for a taper acceleration, but much will depend on the recovery of the jobs market. Strong employment numbers could push the U.S. central bank into speeding up its withdrawal of bond purchases.

Key data points:

Before we consider the expectations for the impending jobs data release, let’s look at some of the leading indicators from this week. While we cannot predict the NFP number based on this data, they can give us a rough idea on what to expect.

• ISM Manufacturing PMI 61.1 vs 61.0 expected and 60.8k previous
• ADP Nonfarm Employment Change 534k vs 525k expected and 570k previous
• Initial Jobless Claims vs 22k expected and 199k previous

All figures stated above exceeded expectations, and this could hint at a potentially better than expected NFP number.

Expectations:

• Nonfarm Payrolls: The market is expecting a 550k print. The previous NFP figure came in at 531k – slightly above expectations.
• Unemployment rate: The unemployment rate is expected to decline from 4.6 percent to 4.5 percent.
• Average Hourly Earnings: Market participants are anticipating a 0.4 percent increase in average hourly earnings (month-to-month). The year-on-year is expected to come in at 5.0 %.

Impact on markets:

This month´s NFP number is likely to exceed expectations, and we could end up with a figure close to the 600k mark. This would easily pave the way for an extension of the Dollar rally.

However, given the current market sentiment, the Dollar is far more likely to strengthen significantly against risk-on currencies, in particular commodity currencies such as the Australian/Canadian and New Zealand Dollar. Gains against the Japanese Yen and Swiss Francs – both traditional safe havens – will be limited.

The sell-off in the Oil market makes the USD/CAD particularly attractive. The Daily RSI is not signaling overbought conditions yet, which means the currency pair could have more room to the upside. A strong NFP print is likely to pave the way for a rally towards 1.2950 and eventually the psychological resistance level at 1.30.

But what if the data disappoints?

In that scenario we could see a relief rally in the stock market, although it might end up being a short-lived one as the new COVID-19 variant continues to haunt markets. Looking at the US500, support at 4485 is the next major level to watch. To the topside, the index is likely to run into strong resistance ahead of the 4633 level.

Gold will be more interesting to watch if the NFP figure disappoints, as we could actually see a sustainable recovery rally there. The precious metal would normally benefit from a risk-off market environment, as we have now, but taper fears have prevented an appreciation. However, weak employment data could trigger some dovish repricing that would benefit XAU/USD as well. Gold could see a rally $1815 and eventually $1877 (November high).

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