USD: Trading NFP - Credit Agricole

The August NFP report will likely have a significant impact on risk sentiment as well as it could be instrumental in determining the timing of Fed lift-off. Ahead of the release, CA is expecting a payroll gain of 220K (consensus 218K), stable unemployment rate of 5.3% (consensus 5.2%) and average weekly earnings annual growth of 2.0% (consensus 2.1% YoY).

CA economists further think that despite robust payroll gains, the Fed could still decide to delay lift-off to October mainly because of the recent market turmoil and lingering concerns about China and global growth.

In addition, Draghi may have made Yellen's job more difficult given that the ECB dovishness could reinvigorate global currency wars and increase the risk of accentuated USD-gains in response to Fed tightening. The markets will nevertheless view the NFP release as an important driver of the timing of Fed lift-off.

A NFP print in line of stronger than consensus accompanied by solid weekly earnings' gains will suggest that lift-off cannot be postponed for too long. Given that the investors have pared back significantly their rate hike expectations for September and October, a stronger NFP print will also have a more pronounced market impact in our view. We expect the USD to do well under this outcome with EUR and risk-correlated among the biggest losers.

A weak print, eg a NFP print below 190K and a soft weekly earnings' gain (essentially a sub 2% YoY growth), could lead the markets to pare back lift-off bets. We suspect that while negative for USD, the overall impact may be less pronounced and could see investors selling USD against JPY, EUR and CHF yet again. Any relief rally in risk-correlated currencies should prove short-lived.

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