Before this eventful week is over, there’s just the small matter of the U.S. monthly employment report to consider. Ahead of the release of the nonfarm payrolls data, the US dollar has regained its poise slightly, although it still remains stuck inside the one-month-old range. Could the NFP cause it to finally break out in one or the other direction? The U.S. Department of Labor will report on Friday at 13:30 BST or 08:30 EDT the number of jobs added to the U.S. economy in July, the unemployment rate, and key wage growth figures.
Recently, wage growth has taken on increased importance than the actual jobs number given concerns about rising levels of inflation and in turn interest rates. So, the dollar’s response to the employment report will depend on the outcome of both the headline jobs and wage growth figures.
Current NFP Expectations
The consensus expectations for Friday’s headline non-farm payrolls data point to around 190,000 jobs added in July, after June’s forecast-beating 213,000 print. The July unemployment rate is expected to have dropped back to 3.9% after it unexpectedly rose to 4.0% in June from 3.8% previously. In terms of wage growth, average hourly earnings are expected to have increased by 0.3% after last month’s slightly weaker-than-expected 0.2% increase.
Jobs Data Preceding NFP
Key employment-related releases preceding Friday’s official jobs data have shown a somewhat positive employment picture overall, at least compared to last month anyway.
The ADP employment report came out well ahead of expectations at 219,000 private jobs added in July against a prior forecast of around 186,000. Although this did trigger an immediate rally in the dollar, the greenback did remain bid against most currencies since, especially the pound and euro. As always, it should be kept in mind that the ADP report is typically not a very accurate pre-indicator of the official NFP jobs data from the US Labor Department, and sometimes even misses the mark dramatically.
The other main pre-NFP leading indicator we have had was the employment component of the ISM manufacturing PMI. This rose half a point in July compared to the previous month, even if the headline PMI disappointed expectations. Meanwhile, Jobless claims released in July have averaged 217,250. This compares favorably to both the average expectations of 221,500 for the July releases and the average actual outcome of 221,250 recorded in June.
But perhaps the most important pre-NFP leading indicator – namely, the ISM non-manufacturing PMI employment component – is missing. This will be published after the jobs report on Friday, making it even more difficult to predict the outcome of the NFP. After all, the services is the largest sector of the U.S. economy.
Forecast and Potential USD Reaction
Given the slightly positive overall pre-NFP leading indicators, our target range for the NFP for this month is tilted to the upper half of the average expectations. With the consensus expectations of around 190,000 jobs added in July, our target falls in the range of 185,000-210,000, given the above considerations. Though the U.S. dollar will likely be moved by a host of other fundamental factors, any headline jobs outcome falling above this range should give the US dollar at least a short-lived boost, but potentially a more significant one too. A result falling within the range will unlikely make much of a significant impact. And any reading that falls significantly below the range could result in a dollar pullback.
Of course, the headline result, as previously noted, is not the only important data point. If wage growth figures surpass expectations, then the dollar could see a more substantial boost on higher inflation and interest rate expectations, ceteris paribus.
NFP trade ideas
In the event the jobs and crucially wages beat expectations, then we would favour looking for bullish setups on the dollar against the Chinese Yuan, which has been hit again due not only to the recent US imposition of tariffs on Chinese exports but the prospects of even tougher sanctions after it emerged Donald Trump is considering raising tariffs on Chinese imports to 25 per cent. But as far as the major currencies are concerned, the USD/JPY usually gives a straight forward reaction to the data, anyway. Meanwhile, in the event that the jobs data disappoints, then we would favour looking for bearish setups on the dollar against the likes of Canadian dollar after its recent outperformance.
Will King Dollar be in power for long?
The Dollar Index rose for three consecutive months until its flat performance in July ended that run. The DXY has started August brightly, but it remains to be seen if it will do better than it did last month, when it was hit mainly by profit-taking after its sharp rally in the preceding months. Recently though, a selected number of foreign currencies have shown relative strength against the US dollar, which makes us wonder if the greenback will be able rise further even if the jobs report tops expectations on Friday – particularly given the fact that the Fed’s potential rate hikes for this year are almost priced in. So, we think it will require a big number to move the dollar out of its existing range, while disappointment could easily send it lower as investors go bargain hunting for undervalued currencies, especially those where the central bank has turned hawkish.
One such currency is the Canadian dollar. The Loonie has been supported by a hawkish Bank of Canada, owing to improvement in the North American economy and uptick inflation. The other could possibly be the British pound. Although it slumped on Thursday, interest rates in the UK rose for the second time since the financial crisis. The outlook for tighter monetary conditions in the UK may put a floor under the GBP/USD exchange rate after its recent sharp slide. Elsewhere, the Bank of Japan has made a marginal change in its monetary policy by allowing the 10-year government bond yields to deviate from zero by 0.2% compared to 0.1% previously. This may limit the USD/JPY’s upside potential in the near-term outlook as speculators try and test the limits of BOJ’s commitment in allowing yields to move more flexibly. And finally the EUR/USD has dropped to long-term support around the 1.16 handle and there is a chance it may hold here given the ECB’s recent announcement that it plans to end QE at the end of this year before potentially raising interest rates next summer.
Still, regardless of what happens with the dollar over, say, the next few months, Friday’s non-farm payrolls report has the potential, as always, to move the dollar sharply in one or the other direction at least momentarily. This should provide trading opportunities for both the dollar bulls and bears alike.