Will NFPs Determine Fed Policy?

Posted on

Market Drivers Nov 06, 2015

UK data mixed to slightly better
German Industrial Production plummets
Nikkei 0.78% Europe -.34%
Oil $45/bbl
Gold $1107/oz

Europe and Asia:
EUR German IP -1.1% vs. 0.5%
GBP UK TB -9.4B vs. -10.7B
GBP UK MP 0.8% vs. 0.4%

North America:

CAD Employment 8:30

It’s been a typically quiet night of trade in the currency markets as traders steeled themselves for the marquee event of the week awaiting the release of US Non Farm Payrolls at 13:30 GMT.

There was only a smattering of second tier data on the calendar but it nevertheless translated into mild dollar strength in early morning European trade. In Germany the Industrial Production figure missed by a wide margin printing at -.1.1% versus 0.5% eyed. The result was tempered somewhat by better revisions in the months prior, but it nevertheless points to serious problems in Eurozone’s largest economy as it struggles with the fallout from the VW scandal and slowdown in demand from China.

In UK the data was mixed with Trade Balance and Manufacturing Production a bit better but Industrial Production slightly worse. Cable however ignored the data and continued to slide through the 1.5150 level in the aftermath of yesterday’s dovish BOE presser that shattered any investor illusions about possible tightening in the near future.

UK monetary officials continue to worry about the disinflationary impact of strong currency and are therefore loath to do anything at the moment that could strengthen the pound. Yesterday’s dovish tone took the market by surprise and the pair has been in a one way tumble ever since.

Turning to today’s NFPs the importance of the report cannot be underestimated. The market has now shifted into a full on expectation of December hike and is looking for confirmation of that thesis from today’s employment data. As our colleague Kathy Lien pointed out the data set points to a possibly decent gain of 200K or so given the fact the four week moving average of jobless claims has fallen to 262K and the employment subcomponent of ISM Non- Manufacturing – generally the best predictor of NFPs – is at the 2nd strongest level since August 2005.

If the data does prove positive printing at 200K or better the greenback is likely to extend its rally with USD/JPY rising above the 122.00 level and EUR/USD testing support at 1.0800, Cable could crash to 1.5000 if the market becomes convinced that rate hikes in December are a reality. There is no doubt that traders will also look at the secondary data points such as average weekly wage gains and the unemployment rate, but the headline figure will be key. If the job picture continues to improve the pressure on the Fed to get of the zero bound standard will grow exponentially.

Boris Schlossberg
Managing Director

Leave a Reply

Your email address will not be published. Required fields are marked *