USD/JPY forecast: Strong US wage growth may lift the dollar, NFP a non-event unless horribly weak

Recovers from one-month low, back above 50% Fibo

The Dollar-Yen pair fell to a one-month low of 102.55 after the Fed’s non-committal stance and reintroduction of the word ‘some’ in its forward guidance amid political uncertainty forced investors to move out of the Greenback. 

However, the December rate hike bets as per the CME data rose to as high as 78%, which helped the pair move back above 102.80 (confluence of 50% Fib retracement of 100.08-105.53 + 50-DMA and 100-DMA). The recovery was partly aided by fresh pre election polls which showed Clinton in a narrow lead. 

The spot recovered to 103.20 levels in the US session but retreated again to 103.00 levels on account of the weakness in the US equities. S&P 500 has now suffered its longest losing streak since 2008. 

Non-farm payrolls could miss estimates

The non-farm payrolls number for October is more likely to print below the estimate of 175K. This is because the ISM non-manufacturing data released today showed the employment sub index retreated sharply from the previous month’s reading of 57.2 to 53.2 in October. 

Furthermore, the US University of Michigan consumer confidence in October fell to its lowest level since 2014. The conference board consumer confidence index also dropped to 98.6 in October from 103.5 in September.

The drop in service sector employment and consumer confidence number could easily overshadow moderate gains in the manufacturing sector as highlighted by the ISM PMI released earlier this week. 

Low NFP is a new normal

However, for the dollar bulls, it is more about the wage growth number and less about the payrolls figure. With the unemployment rate at 5.0% and the falling labor force participation rate, a low NFP reading is a sort of a ‘new normal’. Unless, the number is horribly weak… let’s say below 100.00, the focus would remain on wage growth number. 

Focus on wage growth

The average hourly earnings are seen ticking higher to 0.3% m/m from 0.2%. The annualized rate is seen unchanged at 2.6%. A better-than-expected wage growth number could easily overshadow a weaker-than-expected NFP print and thus boost the US dollar. 

Only a combination of sub-100 NFP print and a horribly weak wage growth figure could kill the December rate hike bets and lead to another broad based sell-off in the US dollar. 

Technicals - 50-DMA & 100-DMA bullish crossover

Daily chart

• Recovery from the one-month low of 102.55 to back above 102.80 (confluence of 50% Fib retracement of 100.08-105.53 + 50-DMA and 100-DMA) amid a bullish 50-DMA and 100-DMA crossover suggests the retreat from the recent high of 105.53 may have run out of steam. 
• The pair could revisit 5-DMA level of 103.68, although only a break above 104.32 would signal the continuation of the uptrend from the September 27 low of 100.08.

Weekly chart

• The weekly chart suggests dip demand is likely given the nice basing formation since July and the breach of a long-term descending trend line on the RSI.