U.S. Nonfarm Payrolls Reaction a Toss-Up

The long dollar positions have been battered and bruised during the previous two sessions. Will today’s U.S. nonfarm payrolls (NFP) breathe fresh life into the weaker short EUR positions that were steamrolled over by the European Central Bank (ECB) yesterday? Rate divergence and the eventual possibility that the eurozone needs a quantitative easing (QE) program implemented will in time severely punish the 18-member single unit. Until then, investors will have to navigate through the more pronounced intraday volatility that requires avoiding an abundance of head fakes. Nevertheless, these market moves provide more trading opportunities that investors need to act on.

The initial EUR price action after ECB boss Mario Draghi’s press conference would suggest that the market was being unrealistic to the outcome — the market’s disappointment saw the EUR rally to new intraday highs (€1.2682). The majority was expecting a figure on the expected size of the asset-backed securities (ABS) program, while the remainder required Draghi to talk the EUR lower. In reality, neither was ever going to happen.

Clueless Traders Disappointed by Draghi

During his press conference yesterday, Draghi spent most of his time side-stepping both of those questions. It’s clear that eurozone policymakers would view a weaker EUR as “consistent with the future divergence in monetary policy, and that they want the combination of non-conventional measures to boost the balance sheet by more than €1-trillion.” The simple fact that the EUR was initially pushed higher was because Draghi did not add anything new. The market was looking for a firm hint that the ECB is edging closer to a full-scale QE program. Analysts suggest that Draghi’s language on Thursday would take formal sovereign QE off the table for a long time, hampering his old “whatever it takes” pledge. The market needs to continue to look at the bigger picture, while also taking into consideration the timing of events; otherwise weaker positions will time and again be easily sideswiped during the noise. The dynamics for a stronger U.S. dollar remain — it has more to do with timing.

The number of new applications for unemployment benefits fell again last week (-8k to +287k, week-over-week). Is this a good omen for today’s NFP? The four-week moving average fell -4,250 to +294,750. It had been hovering around the +300k print since July. This would suggest that U.S. companies are not letting go as many individuals these days, especially now that the American economy is growing at such a healthy pace (+4.6% in the second quarter). More importantly, individuals who happen to be laid off are optimistic about how quickly they will find a new job, hence, the reluctance to file for unemployment insurance. This week’s private sector jobs report increased by +213k and is giving the market hope that the NFP for September will bounce back and print a healthy +220k headline, easily beating August’s modest +142k print.

Dollar Bulls Ready to Charge

The Federal Reserve’s forecast of end-of-year unemployment rate at +5.9-6.0% looks plausible, with a bit of downside risk. However, September consensus remains at +6.1%. Yesterday investors found it hard to keep U.S. bonds down despite the upbeat jobless claims and what’s expected to be a solid showing in today’s report. Global equities took it on the chin, mostly on the back of the Hong Kong protests, and the lack of further easing action from the ECB. Assuming the payrolls headline comes in close to consensus or stronger, it should renew the strong dollar interest in a hurry. Investors will need to be patient, and look beyond the initial headline, as the monthly revisions are just as important.

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