City Index spot on for NFP as dollar finds its feet

The US labour market report for June showed 222k jobs were created, pretty much spot on with City Index’s proprietary model, which predicted an above consensus reading of 217k. We had argued that the great and the good of Wall Street had been too pessimistic on the outlook for the US economy and with job growth rising at its fastest pace since February; the US is back in business.

Overall, this was a solid jobs report. Even though the unemployment rose, it was from a low base of 4.4% from 4.3% in May, and the 2.5% wage growth was still higher than May, although wages have pulled back from their Feb high of 2.9%.

Signs of fundamental strength in US labour market

Perhaps the most encouraging elements of this report, after the headline NFP number, was the pick up in the labour force participation rate (up to 62.8% from 62.7%), and the increase in weekly average hours worked, which rose to 34.5 hours from 34.4. While a month’s worth of data does not make a trend, an increase in working hours and a rise in the labour force participation rate, if it continues, would suggest a fundamental improve in the US labour market, which would be a positive development for the US economy.

Dollar basks in warm glow of NFP

As we have mentioned, NFP can determine the theme of the dollar for the rest of the month, and today’s better than expected number is supportive of a strengthening buck after the dollar index recently fell to a nine-month low. The dollar index is back above 96.0, and US Treasury yields are also higher. We mentioned in our pre-NFP analysis that USD/JPY and GBP/USD are the dollar pairs most sensitive to the NFP report, while the euro and stocks have no correlation of note. Our analysis has played out today, with the JPY and GBP the weakest performers vs. the USD in the G10, falling 0.8% and 0.7% respectively. USD/JPY has had a strong positive reaction to this report, rising to its highest level since May and is heading towards 115.00 key resistance, while GBP/USD backed away from recent highs.

The G20 a risk factor for the dollar

While USD/JPY is rallying on Friday, whether it not it can continue to do so may depend on the outcome of the G20 this weekend. While President Trump has spoken of an existential crisis in the West, Germany’s Angela Merkel was talking of more banal matters when she said that it was proving difficult for the G20 to agree on trade. With Brexit and a more protectionist stance from the US, no wonder it’s tough to reach an agreement.

If it looks like the world’s major leaders are not on the same page when it comes to trade policy, it may be a bad omen for the future of global growth. Thus, if the market senses tension in the G20 communiqué, which is released this weekend, we could see a drift away from risk assets and a short-term boost for safe havens like gold and the yen at the start of the new week. However, for now the buck is happy to bask in the glow of a strong NFP report, one that dollar bulls have had to wait a long time for.