Wages Will Drive Dollar Trade Today

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Market Drivers May 5, 2017
Kuroda comments drive USDJPY lower
Markets quiet ahead of NFPs
Nikkei holiday Dax -0.28%
Oil $45/bbl
Gold $1235/oz.

Europe and Asia:
AUD RBA Monetray policy statement

North America:
USD NFP 8:30
CAD Employment 8:30

FX markets were in a typical pre-NFP lull today, comments by BOJ Governor Kuroda sparked a selloff in USDJPY today with the pair tumbling to 112.20 in late afternoon Asian trade.

In an interview with CNBC, BOJ Governor Kuroda noted that he “was quite sure” that he could raise wages and price significantly and that the central bank would meet its 2% inflation target by 2018. He stated that although the growth rate of 1.5% was not great, it was nevertheless, well above the potential median growth rate and as such was helping to shrink the output gap. That, in turn, would put upward pressure on wages and prices and help Japan achieve its inflation target in the foreseeable future.

USDJPY dropped more than 40 pips on the hawkish tone of the comments but remained above the 112.00 figure in pre-NFP trade. We noted yesterday that the pair was encountering resistance at the 113.00 level and Mr. Kuroda’s comments simply accelerated the pullback from that key resistance level.

In North American session, however, the dynamic could change completely if the Non-Farm payrolls data surprises to the upside. Although the headline focus will be on jobs with market eying a print of 194K versus last month’s gains of 98K, the market focus will be on wages. The Fed has made it perfectly clear that it considers the economy to be at near full employment and therefore any incremental gains in jobs are not nearly as significant to their policy objectives as the rise in wages. To that end even if the jobs number misses but average hourly earnings rise by the expected 0.3% the dollar could see a strong rally with USDJPY taking out the 113.00 figure in the aftermath of the release.

Strong wage growth would confirm the Fed’s thesis that growth is finally having an upward effect on price levels demanding a return to normalization of monetary policy. If however, the wage data comes in soft much of the bullish case for a rate hike could evaporate. With recent US economic data mixed and with wage growth tepid, the Fed would have a very difficult time justifying a rate hike in June and any delay in their action could send USDJPY back to 110.00 level over the next few weeks.

Boris Schlossberg
Managing Director

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