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Will 2020's First NFP Report Help the Dollar?

It has been a good week so far for the US dollar and on the eve of the first employment report of the year, the greenback extended its gains against all of the major currencies. The rally was fueled by the record breaking moves in US stocks and encouraging words from Federal Reserve Presidents. Bullard for example sees a soft landing this year, Evans described the economy as being in a good place, Barkin is encouraged by the jobs report and pace of holiday spending while Kaplan sees 2-2.5% GDP growth in 2020 with possibly even stronger growth if the headwinds ease. The initial panic following Iran's retaliation to the killing of a key military general fades slowly as both sides step back from a full blown war but sudden escalation is always a risk particularly after Iranian commanders threaten more attacks.
 
While geopolitics remain front and center for a few hours on Friday, it will take a backseat to data. Labor market numbers are due for release from the US and Canada. Based on the performance of the greenback, it appears that investors are bracing for a good report. However job growth in November was much stronger than expected (266K vs. 180K forecast) with an unemployment rate that dropped to 3.5% from 3.6%. This month, job growth is expected to have slowed to 160K leaving the unemployment rate unchanged at 3.5%. Given the 100K deviance predicted for December compared to November, the headline number will be just as important as the revisions and average hourly earnings this month. Back in November, wage growth was revised sharply lower and in December, it is expected to recover.
 
The arguments for stronger vs. weaker non-payrolls are evenly balanced although the decline in the employment component of non-manufacturing and manufacturing ISM combined with last month's outsized increased favors a softer release.
 

Arguments in favor of stronger payrolls

  1. ADP rises to 202K from 124K
  2. 4 Week jobless claims remains unchanged
  3. Higher University of Michigan Consumer Sentiment Index
  4. Drop in Challenger Layoffs

Arguments in favor of weaker payrolls   

  1. Minor decline in employment component of non-manufacturing ISM
  2. Decline in the employment component of manufacturing ISM
  3. Rise in continuing claims
  4. Drop in Conference Board Consumer sentiment index
 

The scenarios 

If NFPs rise by 160K or more & wages rise 0.3% (with no meaningful downward revisions), USDJPY could hit 110.
 
If NFPs rise by 160K or more & wages rise by less than 0.3% (with no meaningful revisions), USDJPY should stay below 110.
 
If NFPs rise by less than 160K & wages rise 0.3% (with no meaningful revisions), USDJPY should stay below 110.
 
If NFPs rise by less than 160K & wages rise less than 0.3% (with no meaningful revisions), USDJPY will break 109.
 
Canadian labor market numbers are also on the calendar. Investors have been selling loonies since this week's disappointing IVEY PMI report but according to IVEY, labor market conditions improved at the end of the year. This is consistent with the recovery that is expected after last month's abysmal decline. If you recall, job growth was expected to increase by 10K in November but instead it dropped a whopping -71K. So not only are upward revisions expected to this release but a rebound is anticipated as well. Economists are looking for the economy to add 25K jobs and for the unemployment rate to fall to 5.8% from 5.9%. If US data disappoints and Canadian data beats or vice versa we could see big moves in USD/CAD.
 
Finally while the US dollar was the best performing currency today, the worst was the New Zealand dollar. There was no specific data to justify the decline but commodity prices and trucking activity fell in December according to ANZ. Euro resisted some losses thanks to stronger German industrial production but the Australian dollar shrugged off better trade data. Sterling will also be in focus tomorrow with industrial production, the trade balance and monthly GDP numbers scheduled for release.

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.

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