2 Big Event Risks, One Currency Pair

There are 2 major event risks in the next 24 hours that could have a dramatic impact on the foreign exchange market and one currency pair in particular – USD/JPY. For the past 2.5 weeks, USD/JPY has been trading within a 200-pip range itching for a breakout. Of course it is not the only currency pair prime for a big move as EUR/USD and USD/CHF have been trading in even narrower ranges. Tomorrow’s U.S. non-farm payrolls report and day 2 of President Trump and President Xi’s Summit could lead to market moving headlines. The consolidative price action in the dollar tells us that investors don’t know what to believe – ADP or ISM. Corporate payrolls surged in the month of March according to ADP but job growth was the slowest since August according to the ISM. We know that the ISM report has a stronger correlation with NFP, but the following list shows that the arguments in favor of stronger payrolls far exceed the arguments in favor of a weaker release. In fact, there are only 2 reasons why payrolls could miss – job growth was very strong over the past 2 months and non-manufacturing ISM declined. The 4-week moving average of jobless claims is up slightly but as today’s data shows, claims are at a 5-week low.

Trading the non-farm payrolls report is always tricky because of all of the underlying components. In recent months, investors have focused primarily on average hourly earnings. Wage growth fell short of expectations next month and if it accelerated in March, the dollar will soar as long as payrolls meet or beat expectations. Even if job growth slows to 160K and wages rise, the dollar will be bid higher. However if wage growth slows, even a 225K NFP print may not be enough to save the dollar. Only an increase in excess of last month’s rise could be enough to offset a 0.1% slowdown. If wages grow at the same pace as February, then the headline number becomes more important. Wage growth is difficult to predict and the most important part of tomorrow’s release. Here is a look at how the leading indicators for non-farm payrolls stack up:

Arguments in Favor of Stronger Payrolls

1. Challenger Reports Significantly Smaller Rise in Layoffs

2. Continuing Claims Down Slightly from Feb

3. ADP Reports 263K vs. 245K

4. Rise in University of Michigan Consumer Sentiment Index

5. Conference Board Consumer Confidence Index Hits 17 Year High

6. ISM Mfg Employment Strongest Since November 2013

Arguments in Favor of Lower Payrolls

1. 4 Week Average Claims increased since Feb

2. Non-Mfg ISM Employment Component Dropped to Lowest Level Since August

In addition to the U.S. jobs report, President Trump and President Xi will hold a press conference tomorrow (no time has been set) and the outcome of the meeting could have a significant impact on the financial markets. The BEST case scenario is for both leaders to shake hands, smile and talk about a stronger relationship. However if the meeting ends with the same awkward press conference as the one held with German Chancellor Merkel, the markets won’t be happy and risk appetite could suffer which would mean further losses for USD/JPY and other high beta currencies.

USD/CAD is also in play tomorrow with Canada’s employment report scheduled for release. The Canadian dollar performed well today on the back of rising oil prices but if job growth slows, USD/CAD could make another run for 1.35. Last month, full time work rose by 105K, which was the strongest increase in at least 20 years. This jump drove the unemployment rate down to its lowest level in 2 years. After such a big improvement, a retracement is likely. Coming off the heels of a surprisingly weak trade report, USD/CAD could soar on a big drop in employment and full time work in particular. The Australian dollar trended lower on the back of softer Chinese data and lower commodity prices. According to Caixin, economic activity in China slowed in the month of March with the composite PMI index dropping to 52.2 from 52.6. Gold, copper and iron ore prices also declined. The New Zealand dollar on the other hand spent the day in a tight range and ended the NY trading session unchanged versus the greenback.

Euro drifted to the bottom of its recent range following softer data and dovish ECB comments. ECB President Draghi is still worried about inflation – he said it is clearly too soon to declare success on inflation and they need more inflation confidence to change their stance. As such, he sees no need to deviate from the wording of forward guidance even as the balance of growth risks seem to be shifting upwards. ECB member Constancio agrees that it is too soon to declare success on inflation and Praet believes rates should stay at present or lower level well past QE. The ECB released the account of the March 8-9 monetary policy meeting and according to the report, policymakers felt that removing their downward bias in March is premature as some viewed the baseline outlook as overly optimistic. With that in mind, they agreed that a discussion on normalization is warranted in the future. The main takeaway from all this should be the ECB’s dovish persistence. Data has been good but not great and this is confirmed by the smaller than anticipated rebound in German factory orders. Sterling traders finally took GBP/USD to 1.25 but the move faded quickly off this key level. There were no U.K. economic reports released but that changes tomorrow with industrial production, house prices and the trade balance on tap. While important, the real move in GBP/USD will be determined by the U.S. non-farm payrolls report.