|

USD: Why a strong Nonfarm Payrolls may not be enough?

Between hawkish FOMC minutes, a strong ADP report and surge in Treasury yields the U.S. dollar should be stronger. However in the last 48 hours, the greenback pulled back against the Japanese Yen, saw modest gains versus commodity currencies and consolidated against euro and sterling.  This is partially due to the sell-off in stocks but at the end of the day the Federal Reserve clearly telegraphed their plans to raise interest rates at the end of the year. The minutes, ADP and Treasury yields simply reinforced the central bank’s guidance. 
 
This raises the question of how much positive impact a strong non-farm payrolls report will have on the U.S. dollar.  We worry that a good jobs report won’t be enough. There’s no doubt that we’ll see an initial dollar rally if NFPs exceed 400K but unless it’s a blow out number, the rally may not last. Especially since omicron infections put many people out of work from late December into January.
 
With a consensus forecast of 400K, economists and investors expect stronger job growth.  There’s currently a severe labor market shortage in the U.S with job openings near record levels, ADP reporting its strongest one month rise in private payrolls since May, jobless claims falling, confidence improving and the manufacturing sector adding new workers at a faster pace. However this morning, we learned that job growth slowed in the service sector and while the employment component of non-manufacturing ISM is the most reliable leading indicator for NFPs, this month’s decline may reflect catch up from last month’s rise. 
 
In order for the dollar to sustain its gains, the jobs report will need to be so good that it fuels expectations for an accelerated rate hike Q1 and/or four rate hikes this year. That would require job growth to exceed 650K, the unemployment rate to fall further and average hourly earnings growth to accelerate. But the data will need to beat in a very big way for USD/JPY to break 116.50 and EUR/USD to drop to 1.12. EUR/USD has been trading in a very tight range waiting for NFP breakout.
 
Here are the arguments for strong versus weak payrolls:

Arguments for Stronger Payrolls

  1. Employment Component of ISM Manufacturing Rises
  2. ADP Reports Strongest Private Payrolls Since May
  3. 4 Week Average Jobless Claims Declines
  4. Drop in Continuing Claims
  5. Rise in University of Michigan Consumer Sentiment Index
  6. Rise in Conference Board Consumer Confidence

Arguments for Weaker Payrolls

  1. Employment Component of ISM Services Declines
  2. Rise in Challenger Job Cuts

The Canadian dollar will also be in focus with CAD employment and IVEY PMI reports scheduled for release. More than +153K jobs were created in Canada in November – a number no one expects the country to match. Economists are looking for an increase of only 27K jobs in December. Even if the number is good, the return of coronavirus restrictions will hamper job growth in January. With the simultaneous release of U.S. and Canadian job reports, USD/CAD and CAD/JPY will be the currencies to watch. Beware of steep losses in CADJPY if both reports fail to impress.

Author

Kathy Lien

Kathy Lien

BKTraders and Prop Traders Edge

Having graduated New York University’s Stern School of Business at the age of 18, Ms. Kathy Lien has more than 13 years of experience in the financial markets with a specific focus on currencies.

More from Kathy Lien
Share:

Editor's Picks

AUD/USD bulls regain control above 0.6950 amid USD retreat

AUD/USD regains traction and extends the previous day's bounce from the weekly low, aiming for 0.7000 in Asia on Friday. The overnight pullback in US bond yields keeps the US Dollar below an 18-month high, which in turn offers some support to the pair. Meanwhile, hawkish RBA expectations also keep the major underpinned.

USD/JPY holds gains near 158.00 after Japan's weak Household Spending data

USD/JPY clings to gains around 158.00 after data showed on Friday that Japan's Household Spending fell for the ninth straight month, undermining the Japanese Yen. Meanwhile, the US Dollar remains depressed as the overnight fall in US bond yields counters a hawkish Fed and geopolitical uncertainties, could cap any downside in the pair.

Gold remains range-bound below $4,200

Gold has given up some ground after an initial bullish attempt to reach weekly highs, returning to below the $4,200 mark per troy ounce on Friday. The US Dollar’s strong upside momentum, combined with rising US Treasury yields across the curve, seems to keep further gains in the yellow metal under scrutiny.

Has Bitcoin really escaped the macro forces it was built to fight?
Over 17 years ago, Satoshi Nakamoto designed Bitcoin (BTC) on the back of a global financial crisis as an alternative to the global monetary system outside the control of central banks, governments and traditional intermediaries. This raises a key question: has Bitcoin really become independent of the macroeconomic forces it was built to challenge?
The Euro is not the sick man of Europe. France's bond market is
EUR/USD remains under pressure, near the 17-month low of 1.1161 reached on Monday. The pair has lost more than 7% since its yearly peak, as concerns over France's public finances increasingly weigh on the single currency. But behind the weakness of the Euro (EUR), the problem does not necessarily lie with the European economy as a whole.
Has Bitcoin really escaped the macro forces it was built to fight?
Over 17 years ago, Satoshi Nakamoto designed Bitcoin (BTC) on the back of a global financial crisis as an alternative to the global monetary system outside the control of central banks, governments and traditional intermediaries. This raises a key question: has Bitcoin really become independent of the macroeconomic forces it was built to challenge?