NFP Preview: What to expect for USD?

Non-farm payrolls are scheduled for release on Friday and investors are looking forward to a strong report. Job growth is expected to top 500K with the unemployment rate falling to at least 5.1 percent. The U.S. dollar held steady ahead of the report with small gains against most major currencies. Treasury yields resumed their rise as investors expect the September jobs report to reinforce the Federal Reserve’s case for tapering asset purchases. Of course, it won’t take much as Fed Chairman Powell said at their last meeting that tapering could “easily” happen in November and it will not be contingent on a “knockout” payroll report. So as long as job growth is more than the previous month, we see a November taper announcement from the Fed. This means that while a softer headline number could drive the dollar lower initially, it is likely to recover in the week ahead. Also, if the unemployment rate falls to 5%, it could offset any headline weakness.   
 
A good #NFP number is not a done deal. While ADP reported higher private sector job growth and there were fewer jobless claims on an average basis, the employment component of ISM services, which has a very strong correlation with NFP declined. With that in mind, we are still looking for a strong report because the decrease was small. The drop in the Conference Board’s consumer confidence index is also offset by the rise in the University of Michigan survey. Layoffs increased according to Challenger Grey & Christmas but the uptick was from a 24 year low in August. 

Arguments in Favor of Stronger Payrolls
 
1.    ADP Employment Change Rises to 568K from 340K
2.    ISM Manufacturing Employment Rises to 50.2 from 49
3.    University of Michigan Consumer Sentiment Index Bounces in September
4.    4 Week Average Jobless Claims Lower in Sept vs. Aug
5.    Lower Continuing Claims
 
Arguments in Favor of Weaker Payrolls
 
1.    ISM Services Employment Index Drops to 53 from 53.7
2.    Conference Board Consumer Confidence Hits 7 Month Low
3.    Challenger Job Cuts Up 13.8% from 24 year low
 
Meanwhile the prospect of a temporary debt ceiling deal drove risk currencies and equities higher on Thursday. All of the Japanese Yen and Swiss Franc crosses gained strength. The best performing currency continues to be the Australian dollar. With the country heading into summer, fewer restrictions and higher levels of vaccinations should lead to a robust recovery. Euro remained on its backfoot with German industrial production falling more than expected. Over the past two weeks, we’ve seen more negative than positive surprises in Eurozone data. The Canadian dollar traded higher despite lower oil prices. The IVEY PMI index rose to its highest level in 3 months. Canadian labor market numbers are also due for release tomorrow and like ISM services, the employment component of IVEY fell sharply in September. This decline is consistent with the slowdown in Canadian job growth that economists are anticipating. USD/CAD and CAD/JPY could be present some interesting opportunities on Friday.