What Do We Need to See from NFP For Dollar Breakout?

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Market Drivers Aug 7, 2015

NFP – need 200K+ at least 0.2% wage growth for Fed Sep. hike
RBA – counting on Fed fro further AUD declines
Nikkei 0.29% Europe -.48%
Oil $45/bbl
Gold $1092/oz.

Europe and Asia:
AUD Home Loans 4.4% vs 5.2%
EUR Industrial Production -1.4% vs. 0.3%

North America:
USD NFP 08:30

CAD Employment 08:30

It’s been a typically quiet pre-NFP night in the forex market with most major currencies content to carve out narrow ranges as traders prepare for the marquee event of the week – the US NFP report due at 12:30 GMT.

The only move of note was in the Aussie which popped 25 pips higher in the wake of the RBA Monetary policy report which was a tad more upbeat about the economy but more importantly stated that the AUD/USD was expected to fall once the Fed begins its tightening cycle. This was in fact an implicit admission that the RBA is done cutting rates for the time being and therefore was viewed positively by the market with AUD inching back towards the 7400 figure.

After relentless selling all summer long, the Aussie appears to have found a modicum of support at the 7250 level and unless the US data proves to be unambiguously positive, the Aussie is likely to hold the lows and start a short covering rally towards the 7500 figure.

At this point almost all movement in FX depends on the strength of the dollar as the markets assess whether the Fed will move to hike rates in September or December. Comments by Fed Atlanta President Lockhart ignited a move in the greenback earlier in the week as he seemed to suggest that the time to hike is now. However, even Mr. Lockhart admitted that the Fed will be very data sensitive when it comes it decision which is why this month’s report looms so large in the market psyche.

Here is what we believe is necessary convince traders that a September hike is for real. The NFPs need to print comfortably above 200K and more importantly wage growth needs to rebound by at least 0.2% on a month over month basis.

The leading data ahead of the NFPs has been mixed. Our colleague Kathy Lien pointed out that while the employment component of ISM Services, the weekly jobless claims and the continuing unemployment claims all suggest robust labor demand there have been offsetting data points that give the market pause. Most damaging to the dollar bull case is the sharp drop in ADPs to below 200K level and perhaps most troubling of all the slide in Consumer sentiment.

It is hard to believe that consumer sentiment would weaken so much amidst decline in energy prices unless wages showed no upward gain. It’s quite conceivable that jobs could once again top the 200K mark, but that wage growth remains stagnant. Under those conditions a Fed rate hike in September would become much more problematic. Although the Fed tries to convince the market that it bases its policy action on economic data only, the FOMC and the chairwoman especially are keenly aware of consumer sentiment and are only likely to act if they believe that a rate hike will not damage confidence. If wages remain stagnant, confidence will be fragile and the Fed is likely to err on the side of caution.

If the numbers are clearly strong than the pop in the dollar could be substantial and the key levels that all traders will watch will be 125.50 in USD/JPY and 1.0800 in EUR/USD. A break of those barriers could be the start of a fresh new leg in the dollar rally.

Boris Schlossberg
Managing Director

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