This post originally posted by AxiTrader
Quick Recap
Markets are on tenterhooks waiting for the release of US non-farm payrolls at 8.30am New York time Friday. To say that the data is super important for the Fed, the US dollar, bonds, stocks and commodities is an understatement.
It's especially important for the Aussie dollar which many pundits have been expecting to collapse below 70 cents once the Fed start raising rates again.
Here's a preview of the numbers and the US dollar and AUD/USD outlook.
What You Need To Know
Non-farm payrolls is the biggest data release most months.
This month's data, for August and to be released at 10.30pm east coast time in Australia tonight, is arguably the most important single jobs number in years. That's because the Fed has made it clear both in the run up to, and at, Jackson Hole it has a desire to again raise interest rates in the US.
Just last night Loretta Mester, president of the Cleveland Fed, said for the second time this week that the case to raise rates is compelling.
"The economy is basically at full employment," Mester said. And that means "it seems like a gradual increase from a very low interest rate that we are at now is pretty compelling to me," she said.
On her own that would be an interesting observation. But Mester is part of a very long line of Fed spokespeople, including the very senior Stanley Fischer (Fed vice-chair) and William Dudley (New York Fed president) amongst many others including the Fed chair Janet Yellen herself who have made the case to raise interest rates in the US soon over the past month.
What makes non-farms so important in this context is that the fed has been focussed on employment, wages growth (yes there is some), and consumption as the key drivers of their move to normalise interest rates back to more "normal" levels in the United States.
Jobs, and their availability, drive the large portion of this.
Take the consumer confidence data released earlier this week. Not only did it rise to an 11 month high but a sub index of the ease or difficulty of finding a job rose to the highest level since the GFC.
Which brings me to tonight's data - and what the market is expecting
- Increase in non-farm payrolls: +180,000
- Unemployment rate: 4.8%
- Average hourly earnings increase month-on-month: +0.2%
- Average hourly earnings increase year-on-year:+2.5%
- Average weekly hours worked: 34.5
- Change in manufacturing payrolls:-4,000
The non-farm's number is the key one traders will react to. But it is the combination of all of the above if the headline is in the ballpark which economists, and the Fed, will look to to gauge whether a Septmber hike has increased, or decreased, in probability in the wake of the release.
One thing worth noting in this context is that August is a month that is a serial underperformer when it comes to market expectations. My colleague David Scutt at Business Insider reported this morning that 'August non-farm payrolls have underwhelmed the market consensus in 15 of the past 19 years".
The average undershoot for the past 5 years has been around 50,000 jobs.
The Outlook for the US dollar and the Aussie
Overnight the US Dollar Index was a little weaker as a combination of overhead technical resistance and weaker than expected manufacturing PMI combined to see traders take some money off the table.
Here's the chart of the US dollar index from my Reuters Eikon terminal. You can see the obvious resistance the dollar has to bust, in index terms, to push higher. Not hard to see why the PMI data resonated.
For the Aussie dollar what non-farms say, and what the fed does, couldn't be more important.
For well over a year the RBA has been expecting that the full cycle of Fed rate hikes would be the catalyst for a lower Aussie dollar. Likewise many pundits who were forecasting the Aussie to collapse into the mid-to-low 60 cent region had the US dollar strength associated with the fed tightening cycle as a key component of that weakness.
To a certain extent some of that enthusiasm for the Aussie dollar's downside has been tempered by it's remarkable strength in the face of almost universal bearishness.
That makes it vulnerable - especially given longs were rebuilt by the speculative community recently.
Looking at the charts for the Aussie and there is still a clear downside bias on the dailies and the weeklies while below 0.7830/50 - the region which holds the 38.2% retracement level of the 93 cent to 68 cent fall in recent years.
Closer to hand, on the dailies and in the immediate term my bias is still for a test toward 74 cents. resistance topside is 0.7586 then 0.7620 with support at this week's low of 0.7489 and then my target of 0.7387/0.7400.
Have a great day's trading
Greg McKenna
Chief Market Strategist AxiTrader