Dollar Crashes on China, Will NFPs be the Nail in the Coffin?

Investors continued to dump US dollars today with the greenback trading lower against all of the major currencies. USD/JPY was hit the hardest but significant losses were also seen for the dollar against GBP and NZD. Federal Reserve Chairman Powell's optimistic outlook for the economy and the labor market failed to translate into strength in the currency because even though further easing is unlikely, tightening isn't on the horizon either. Today's personal income and personal spending reports missed expectations but most importantly, investors worry that Friday's non-farm payrolls number could be ugly.

Economists are looking for only 85K jobs in the month of October, down from 136K in September. According to some of the broader economic measures that we track pre-NFP, there's a strong case for weaker job growth this month. However the forecast for NFPs is very low and both the ISM and non-ISM manufacturing reports won't be released until after payrolls - leaving us without two of the most reliable leading indicators for NFPs. The Fed's rate cut this week is a sign of weakness in the economy but Powell also emphasized the labor market's strength.

Still we expect job growth to slow but the change in non-farm payrolls may not be as dismal as the forecast. However the unemployment rate, which hit a 40 year low last month should rise and we worry that wage growth will be softer than economists predict. They are looking for wages to grow by 0.3% after stagnating in September. If NFPs print below 90K and average hourly earnings is 0.2% or lower, it will be the nail in the coffin for the US dollar. USDJPY will hit 107.50 while EUR/USD heads towards 1.12. If NFPs are 90K or better and average hourly earnings is 0.3% or higher, we should see a nice recovery in the beleaguered greenback.

With that said, a stronger payrolls report will have a smaller impact on the dollar than a weak report given the uncertainty around US-China trade relations. There are reports that Chinese officials doubt hat a long term trade deal is possible with President Trump. According to Bloomberg, there were private conversations in Beijing where Chinese officials said they wont budge on major issues and relayed low expectations that further negotiations could result in anything meaningful. Larry Kudlow was quick to say that US-China talks are going smoothly but given the back and forth that we've seen over the past few years, investors are worried about another setback. At the end of the day, the US' commitment to a trade deal will be evident in their handling of the December tariffs. It will be very good sign if they are cancelled or delayed but if they implemented, it confirms everyone's fears. Interestingly enough AUD and NZD are not hurting from this news but their gains should be limited.

Arguments in Favor of Weaker Payrolls

1. Challenger reports larger decline in layoffs -33.5% vs. -24.8%
2. 4 Week Average Jobless claims rise slightly to 214.7K from 212.7K
3. Continuing claims rise to 1.69K from 1.68K
4. Consumer Confidence drops 

Arguments in Favor of Stronger Payrolls 

1. ADP Employment Change at 125K vs. 93K
2. University of Michigan Sentiment Index Higher 

Lastly the Bank of Japan left interest rates unchanged last night but their pessimism was made clear by the change in forward guidance and lowered growth forecast. The BoJ dropped their calendar guidance in favor of one tied to its confidence in reaching the inflation target. According to Bank of Japan Governor Kuroda, the global economic recovery will be delayed by a half year or more and they won't hesitate to ease further if the risks rise. All of this should have been yen negative because the BoJ is actively considering more stimulus but when the comes the yen, nothing matters more than risk appetite.