How will Non-Farm Payrolls Impact the Dollar?

• How Much Impact will Payrolls have on the Dollar?
• EUR: No Deal Until Greek Referendum
• NZD Sinks to New Lows after Dairy Auction
• USD/CAD Tanks as Oil Drops 4%
• AUD Hit by Weak Manufacturing Data
• GBP Slips on Weaker PMI

 How Much Impact will Payrolls have on the Dollar?

With the laser focus on Greece this week many investors are wondering how much impact this month's non-farm payrolls report will have on the U.S. dollar. The greenback has been trading primarily on risk appetite and the next big move for the dollar will most likely be driven by the outcome of the Greek referendum.  A yes vote would drive investors out of the safety of dollars into high beta currencies while a no vote could send the buck sharply higher.  Non-farm payrolls is important especially at this critical juncture of U.S. monetary policy but whether the Federal Reserve chooses to raise interest rates in September or December hinges in large part on how much turmoil the Greek crisis causes for U.S. assets.  If Greece had already struck a deal with its creditors, a strong U.S. labor market report would be significantly positive for the U.S. dollar but in this current market environment a good number would only drive the dollar slightly higher as traders refrain from taking any major positions ahead of the holiday weekend in the U.S. and the referendum on Sunday.  A weaker report on the other hand would give investors a strong reason to dump the dollar and reduce positions into the weekend on the notion that a softer release increases the chance of a later rate hike. While Fed President Bullard believes that Greek economic reports will not affect the U.S. economy, he is hawk who does not have a vote with the FOMC this year.  There's no question that developments in Greece will affect Fed policy through its impact on the financial markets. It will be extremely difficult for Janet Yellen to justify raising rates in September if stocks fall 10%.

Taking a look at the leading indicators for non-farm payrolls, most signs point to a healthy labor market report that should be positive for the dollar.  According to private payroll provider ADP, U.S. companies added jobs at the fastest pace in 6 months.  Consumer confidence is on the rise and jobless claims remain low.  However planned layoffs according to Challenger Grey & Christmas rose by 10% with job cuts seen in the energy and retail sectors - this report does not have a very strong correlation with payrolls.  The primary reason why economists are looking for weaker payroll growth is because last month's report was much stronger than expected.  As such the unemployment rate and average hourly earnings will be more important because unless payrolls rise by less than 200k, investors will be satisfied with the pace of job growth. For the dollar to rally on the payrolls report, we need to see an improvement in the unemployment and an increase in average hourly earnings. In a nutshell, while the non-farm payrolls report is extremely important, the reaction in the dollar could be limited compared to previous months as traders refrain from taking major positions because of the holiday weekend and Greece.  A weaker report should have a more significant impact on the dollar than a stronger one.
 Here's how the leading indicators for non-farm payrolls stack up this month:

Arguments in Favor of Stronger Labor Market Report

1. ADP Rises to 6 Year high
2. Consumer Confidence Rises
3. Rise in University of Michigan Consumer Sentiment Index
4. Sharp Rise in Employment Component of ISM Manufacturing Index
5. Continuing Claims Decline

 Arguments in Favor of Weaker Labor Market Report 

1. Challenger Job Cuts Jump 42.7%
2. Minor Uptick in 4 Week Moving Average of Claims

 
EUR: No Deal Until Greek Referendum

The uncertainty created by the missed debt payment by Greece has officially put the country in arrears and driven the euro lower against the U.S. dollar.  To most people, this means that Greece is in default but the IMF is not a commercial lender so rating agencies will not label Greece as a formal default. Also, the IMF generally provides the country in arrears with a grace period and won't notify the fund's board that a payment has officially been missed until one month later. Angela Merkel and a number of other European officials have made it clear that there won't be a deal until after the referendum.  The polls show only a small majority in the "no" camp so the votes will be close and European policymakers are hoping that the general population in Greece will choose to accept the new bailout terms. July 5th is the next key date for the euro and after that July 20th when Greece owes the ECB 3.5 billion euros.  If this payment is missed, the ECB will most likely pull the plug on liquidity to Greek banks, which would have a more dramatic impact than the latest default, leading to increased uncertainty for Greece, the euro and the financial markets as a whole. Given the July 4th holiday in the U.S. and the referendum risk over the weekend, we expect position liquidation after tomorrow's payrolls report and recommend minimizing euro exposure.

NZD Sinks to New Lows after Dairy Auction

All three of the commodity currencies traded lower today.  The Canadian dollar experienced the steepest losses but the New Zealand dollar fell to fresh 4.5 year lows.  As no economic reports were released from Canada the sell-off was driven entirely by the 4% drop in oil prices.  A rise in crude stockpiles and signs of progress on the Iranian nuclear deal sent oil sharply lower and USD/CAD to its strongest level in 2.5 months. The recent contraction in GDP growth also contributed to the weakness of the currency.  There are a number of resistance levels above with the most important being 1.2635, the 50% Fibonacci retracement 2002 to 2007 decline.  Meanwhile the Australian dollar was hit hard by the contraction in manufacturing activity. The PMI index dropped 8.1 points to its lowest level since July 2013. Further declines in dairy prices drove the New Zealand dollar to new lows.  Today's auction marked the eighth straight session that prices have fallen. The case for another rate cut by the RBNZ has been hardened by this decline, the sell-off in Chinese stocks and global uncertainty.

GBP Slips on Weaker PMI

The British pound traded lower against the U.S. dollar today on the back of softer economic data. Manufacturing activity was expected to accelerate but instead it grew at its weakest pace in 2 years. This pullback in demand was a direct result of the uncertainty in Greece and Europe as a whole. However what is interesting is that while demand from Europe slowed, the latest revisions to Eurozone PMIs show manufacturing activity in the region expanding.  Quantitative Easing, the weaker euro and lower oil prices have gone a long way in stabilizing the Eurozone economy, which without the troubles of Greece would be doing much better.  As these factors continue to lend support to the region, we expect the slowdown in U.K. manufacturing activity to be temporary. U.K. construction sector PMI is scheduled for release tomorrow along with Nationwide house prices.