Trading Dollar and Riding the NFP Rush

This month's blowout non-farm payrolls report pushed USD/JPY to 2-month highs and the EUR/USD and GBP/USD to 6 month lows.  The rush from NFP will be felt for some time as investors place their bets for December liftoff. Fed fund futures went from pricing a 56% chance of a rate hike next month pre-NFP to more than 72% chance after today's report.  Not only did job growth exceed expectations by 86k but at 271k, this was the strongest monthly increase in payrolls this year.  The unemployment rate also dropped to 5%, the lowest level since 2008 while average hourly earnings rose 0.4%, the largest increase since July 2009.  This unambiguously positive U.S. report gives the Fed the green light to raise interest rates in December as long as this month's payrolls gain are not reversed next month. However we've got a few weeks before the next report and from now until then the path of least resistance for the dollar will be higher.  The U.S. calendar is light next week with the primary event risks being Thursday's Fedspeak and Friday's U.S. retail sales report.  This means global developments will share the dollar's focus. 

EUR/USD broke through its 1.08 support level to trade at its lowest level since April 2015.  There are no significant Fibonacci or moving average support below current levels so the main levels to focus on are some spike lows near 1.0660 and then 1.05.  Unless ECB officials start backing away from their call for more stimulus EUR/USD could test 1.05 in the coming weeks as traders position for easing from the ECB and tightening from the Fed. So if you are looking to ride the NFP rush further, selling EUR/USD on any bounce could be a smart trade. The most important event risks on the Eurozone calendar next week will be ECB President Draghi's speechon Wednesday followed by German GDP on Friday.

Next week kicks off with China's trade balance report.  Many countries including the U.K. and Eurozone have cited slower global growth as reasons for why they are concerned about their economy and when they say global, they usually mean China.  There is no question that the PBoC has taken great steps to support growth and they haven't allowed economic data to turn out terribly.  Chances are next week's reports won't be extremely weak but given how the numbers tend to be massaged, upside surprises should provide limited support to currencies as investors eye the numbers with skepticism.  Nonetheless China's trade report will affect the tone of trading at the start of the week. Economists are looking for a larger trade surplus but the main focus for the market will be on the export numbers.

Canada also released strong labor market numbers today but the excitement of the U.S. report overshadowed Canada's release sparking a rally in USD/CAD.  Job growth in Canada was more than 4 times greater than expected.  A total of 44K jobs were created up from 12.1K jobs the previous month. Like the U.S., Canada's unemployment rate dropped to 7% from 7.1% and the participation rate increased to 66%. However most of the jobs gained were part time, which has been a recent trend in Canada and not one that is incredibly positive for the currency. We still believe that there are more reasons for CAD to fall than rise especially on the back of today's 6.7% drop in building permits and decline in oil prices.  Therefore it shouldn't be long before USD/CAD tests its September highs above 1.34.

AUD/USD fell hard on the back of U.S. dollar strength today but compared to most other major currencies, the Australian dollar has held well thanks to the Reserve Bank's neutral and less dovish monetary policy bias.  Relatively speaking, AUD is outperforming non-dollar pairs.  The RBA's comfort with current policy is surprising considering that manufacturing and service sector activity slowed but they believe that the currency's recent weakness and previous easing will support growth.  However we have yet to see a turn in the data and next week's employment report is expected to reinforce the slowdown in Australia's economy.  According to the manufacturing and service sector PMI reports, labor growth slowed significantly in the month of October and we expect that weakness to appear in the official employment report. The jobs number and China's reports will have an important near term impact on the outlook for AUD.

The worst performing currency today was NZD/USD. No economic data was release from New Zealand but the hangover from this week's sharp drop in dairy prices and deterioration in labor market conditions continue to affect the currency.  We expect NZD/USD to drop to 63/64 cents at which point it could stabilize because a weaker currency is exactly what New Zealand needs for a recovery.  New Zealand's PMI manufacturing report is the only piece of NZ data worth watching next week.

Saving the best for last - the British pound will also be in play next week with the country's labor market report scheduled for release on Wednesday. According to the PMIs, employment conditions improved in the manufacturing, service and construction sector last month.  However good data has not helped ease the central bank's concerns because their dovish outlook this week came on the heels of stronger manufacturing and service sector activity. So while GBP may bounce off the employment report, we view the rally as an opportunity to sell GBP/USD at a higher level.