By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
The U.S. dollar appreciated against all of the major currencies today except for the Japanese yen. Better-than-expected jobless claims and a 4.2% drop in layoffs fueled expectations for a strong nonfarm payrolls report on Friday. Economists are looking for a slight slowdown in job growth but any decline will be easily offset by higher wage growth and a lower unemployment rate. As long as both of these predictions are met, the dollar will rise. Its gains should be the most pronounced against the commodity currencies and sterling, which collapsed after the Bank of England’s monetary policy announcement. USD/JPY should also rise but the pair, which has been trending higher for the past 3 months, may find it difficult to recapture 112 unless NFPs beat in a very big way.
The arguments for a strong report are certainly there. ADP increased, consumer confidence is on the rise, jobless claims have fallen and according to Challenger, there were fewer layoffs in the month of July. As long as the outcome is decent, the Federal Reserve will proceed with another interest-rate hike in September. Yet when it comes to trading NFP, market sentiment is just as important as the fundamental ramifications of the report. Unfortunately, USD/JPY is trading softly ahead of the release having failed to extend its gains following the Bank of Japan’s disappointing monetary policy announcement. The pair has been hampered by a combination of risk aversion, rising Japanese yields and President Trump’s trade tantrum. Currently USD/JPY looks poised for a move down to 110.50 but if it manages to close above 111.75, the momentum changes and there’s a chance for a stronger move above 112.
Arguments In Favor Of Strong Payrolls
1. ADP Rises from 181K to 219K
2. Consumer Confidence Index Rises Slightly to 127.4 from 127.1
3. Challenger Reports 4% Drop in Layoffs
4. 4 Week Average Jobless Claims Falls to 214.5K from 224.7K
5. Continuing Claims Drops to 1.72M from 1.74M
Arguments In Favor Of Weak Payrolls
1. University of Michigan Consumer Sentiment Index Declines Slightly
The Bank of England raised interest rates by 25bp for the first time this year and instead of rising, sterling crashed after the monetary policy decision. Mark Carney’s comments were relatively positive with the central bank Governor talking about the economy recovering and inflation rising. They also said ongoing tightening will be needed to return CPI to target but based upon interest-rate futures investors don’t see another rate hike until next year. There are 3 reasons why GBP was dumped on BoE. First, today’s rate decision can be characterized as a dovish hike because Carney identified signs of slowing in business investment. Secondly, he raised concerns about Brexit, describing the talks as entering a “critical period.” As Brexit will have an impact on monetary policy he feels that the central bank needs to be ready for any potential outcome because if Brexit is disinflationary, they may need to ease. By leaving the door open to a hike or a cut, the BoE has disappointed the bulls, which allowed investors to remain focused on sterling’s previous weakness and the possibility of no Brexit deal. Lastly, investors are moving onto NFPs and their hope for a strong number contributed to GBP/USD weakness. If Friday’s PMI services and composite index miss, GBP/USD could extend its slide to the July low of 1.2960.
Despite stronger-than-expected Eurozone producer price growth, EUR/USD fell to a 2-week low. This move was driven entirely by the market’s demand for U.S. dollars as there were very little euro drivers this week. Eurozone retail sales and revisions to regional PMIs are due for release on Friday but the impact will be limited by the market’s focus on NFPs.
The Canadian dollar recovered earlier losses to end day unchanged against the greenback thanks to the strong reversal in oil prices. The price of crude ended up nearly 2% after having started the day in negative territory. The loonie will also be in play Friday with Canada’s IVEY PMI report and trade balance scheduled for release. These numbers could determine whether USD/CAD holds or breaks 1.30. The Australian and New Zealand dollars traded sharply lower Thursday on the back of rising trade tensions. AUD/USD shrugged off a stronger trade balance to fall to a nearly 2-week low. If Thursday night’s PMI services and retail sales report also disappoint, we could see AUD/USD hit a new 1-year low below .7413. Next to the Australian dollar, the New Zealand dollar was the day’s worst performer. Thursday’s break below the 20-day SMA puts the pair on tract to test 67 cents.