Dollar: What to Expect for Non-Farm Payrolls

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Daily FX Market Roundup 07.31.14

Dollar: What to Expect for Non-Farm Payrolls

Sterling Falls to Fresh 6 Week Lows Ahead of UK PMI

EUR Shrugs Off Soft CPI and Banco Espirito Santo Loss

AUD Drops to 7 Week Lows, More Data Expected

NZD: Support from China’s Manufacturing PMI Report?

CAD: GDP Growth Accelerates but Wage Growth Slow

JPY: Softer Labor Cash Earnings Could Worry the BoJ

Dollar: What to Expect for Non-Farm Payrolls

Between the sharp rise in Treasury yields and the flight to quality caused by the sell-off in global equities, the dollar benefitted from both risk aversion and monetary policy expectations ahead of Friday’s non-farm payrolls report. While no one expects the Federal Reserve to raise interest rates this year, market expectations for the Fed Funds rate increased significantly over the past 48 hours and this shift has been extremely positive for the greenback. We are finally beginning to see a bottom in yields and if U.S. data continues to surprise to the upside the long awaited sell-off in Treasury prices and rally in rates could finally be underway. Yesterday’s solid GDP report kicked off the gains in the greenback and today the currency moved higher on the back of a healthy jobless claims report and the sharp increase in the employment cost index. Like many central banks around the world, the Fed is watching wage growth very closely. At her semi-annual testimony on the economy and monetary policy earlier this month, Fed President Yellen specifically said that, “There is some room for faster growth in wages and for real wage gains before we need to worry that’s creating an overall inflationary pressure for the economy.” With wage growth rising at its fastest pace in 6 years in the second quarter, investors will be looking for the Fed to change it tune as early as the Jackson Hole Summit in August or at latest, the September FOMC meeting.

Friday’s non-farm payrolls report is important because while economists are looking for job growth to slow to 231k from 288k, the market is positioning for a strong number and unfortunately other labor market indicators point to the potential for a downside surprise. Thankfully the market may be satisfied anything in excess of 225k as long as the unemployment rate remains steady. Every month we take a look at 8 labor market indicators to help us determine whether NFPs will rise or fall and this month the late release of the ISM non-manufacturing and manufacturing reports leaves us with 6. The strongest argument for a further improvement in the labor market is jobless claims, which have been extremely low. In fact, this morning we saw the 4-week moving average of claims drop to its lowest level since 2006. However continuing claims are on the rise and consumer confidence has been mixed with the Conference Board reporting the highest level of confidence in 7 years during the month of July, which contrasts with the University of Michigan who reported a drop in sentiment. Private payroll provider ADP also reported a smaller increase in corporate payrolls while Challenger Grey & Christmas reported a 24.4% rise in layoff announcements. So while we believe that payrolls will exceed 200k, we do not expect job growth to exceed 288k and what this could mean is a more muted reaction to NFP. As usual the unemployment rate, revisions to last month’s report and average hourly earnings will also affect how the dollar trades on Friday.

Here’s how the leading indicators for NFPs stack up this month:

Non-Farm Payrolls Preview

Arguments for Stronger Payrolls

1. Consumer Confidence Index Soars to 90.9 from 86.4, 7 Year High

2. Four Week Moving Average Falls to Lowest Since April 2006

Arguments for Weaker Payrolls

1. ADP Employment Change Drops to 218K from 281K

2. University of Michigan Consumer Sentiment Index Drops to 81.3 from 82.5

3. Challenger Job Cuts Rise 24.4%

4. Continuing Claims rise to 2.539 million from 2.509 million

Sterling Falls to Fresh 6 Week Lows Ahead of UK PMI

The British pound is in play tomorrow with U.S. non-farm payrolls and U.K manufacturing PMI index scheduled for release. The PMIs are some the most important pieces of monthly data that the U.K. releases because they provide one of the most timely assessments of how the economy is performing. If the PMI index surprises to the downside, there’s no question that GBP/USD will break through the 100-day SMA at 1.6855 and be on its way to test 1.68. Based on the steep decline in manufacturing orders reported by the Confederation of British Industry, the risk to the downside for PMI. This morning’s consumer confidence and Nationwide House price report added to sterling’s pain. House price growth slowed to 0.1% in July while consumer confidence turned negative for the first time in 5 months. The 0.1% increase in house prices was the slowest pace of growth since April 2013 and provides evidence that the government’s stricter lending rules are working but weaker house price growth reduces the chance of BoE easing and increases the motivation for speculators to unwind their long sterling positions.

EUR Shrugs Off Soft CPI and Banco Espirito Santo Loss

The euro ended the day unchanged against the U.S. dollar which is impressive given the barrage of negative euro developments. The biggest story in Europe today is the major loss reported by Portugal’s largest bank, Banco Espirito Santo. In the first quarter, they lost EUR3.58 billion, which wiped out their capital cushion and is now forcing them to raise funding in the capital markets. If needed, the Central Bank of Portugal also has more than EUR6 billion at their disposal to recapitalize banks under their bailout program. European stocks traded sharply lower today on the back of BES’ losses but the euro is down just modestly. Argentina’s debt default also doesn’t help market sentiment and high beta currencies like the euro even though the global ramification will be small. Inflation in the Eurozone grew at a slower pace in the month of July. Economists were looking for prices to grow at a steady 0.5% pace but instead it slowed to 0.4% yoy. Core price growth on the other hand held steady at 0.8%. Considering that the central bank targets 2% inflation, these levels are far from desirable and puts pressure on the ECB to ease. Thankfully other economic reports released this morning were less discouraging. German and French consumer spending rose strongly in June while German unemployment fell more than expected. The Eurozone unemployment rate also dropped to 11.5% from 11.6%. Final Eurozone PMI manufacturing numbers are scheduled for release on Friday but the focus will be on U.S. non-farm payrolls.

AUD Drops to 7 Week Lows, More Data Expected

The Australian dollar extended its losses against the greenback today while the Canadian and New Zealand dollars edged slightly higher. AUD fell to its lowest level versus the greenback in 7 weeks after a series of disappointing economic data. Building approvals fell 5% against expectations for a flat month. This data is important because the housing market has been compensating for the weakness in the mining and non-mining sectors. At the same time, import prices fell 3% as export prices dropped 7.9%. While the pullback was not surprising given the decline in commodity prices, AUD was hit hard because the magnitude puts significant pressure on Australia’s terms of trade. Between a slowdown in the housing market and lower trade activity, AUD could easily drop below 92 cents. From a technical perspective, today’s move puts AUD/USD below the 100-day SMA for the first time since March. The Australian dollar will remain in play for the next 24 hours with Australian and Chinese manufacturing PMI and Australian producer prices scheduled for release. Meanwhile the Canadian dollar recovered on the back of stronger GDP growth. Canada’s economy expanded 0.4% in the month of May, right in line with expectations. However even with stronger growth, average weekly earnings slowed to 2.6% from 3.2% that same month. Like the U.S., the lack of wage growth will keep monetary policy steady in Canada. No economic reports are scheduled for release from New Zealand.

JPY: Softer Labor Cash Earnings Could Worry the BoJ

There was very little consistency in the performance of the Japanese Yen today, which traded higher against some currencies and lower against others. While the slide in global equities prevented Yen crosses from extending their gains, the recent uptick in U.S. yields and softer Japanese data should drive USD/JPY higher and in turn lend support to the Yen crosses. A number of economic reports were released from Japan last night, the most important of which was labor cash earnings. In the month of July, wage growth slowed to 0.4% from a downwardly revised 0.6%. Summer bonuses were particularly weak compared to past years, rising only 0.3% in June. This raises a concern that there is not enough income to boost spending and the economy in the third quarter. Soft wage growth increases the chance of additional easing from the Bank of Japan but with Japanese businesses reporting a shortage of workers and labor markets surveys reporting steady job growth, they will want to make sure that this is a sustained trend before taking action. Housing starts fell less than expected on an annualized basis but construction growth slowed. Tonight, the final manufacturing PMI index is scheduled for release and a revision is usually expected.

Kathy Lien
Managing Director

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