Dollar Bulls Rely On A Strong NFP

Friday August 5: Five things the markets are talking about

Investors continue to look for signs that the U.S. economy remains on solid ground, and today’s ‘granddaddy’ of all fundamental releases, non-farm payrolls (NFP), will provide another glimpse of the health of the U.S economy.

Last month’s employment print showed that the U.S added a whopping +287k jobs in June, signaling renewed momentum in the U.S labor market. Today’s July report (forecast +180k, +4.8% unemployment rate) is expected to quash May’s disappointing +38k headline as an outlier print.

This week’s U.S ADP report rose by +179k in July, evidence that the U.S. labor market remains strong even if job creation is moderating as the economy approaches full employment.

Also boosting market optimism for today’s headline is yesterday’s U.S weekly claims. Despite rising slightly last week, it remains at a level consistent with steady hiring (+269k).

A strong print will have dealers revaluating the likelihood of a Fed rate hike this year, by default, this will have an impact on the strength of the dollar index, and thus set the tone for foreign exchange trading next week. A weak print and the dollar index will renew this week’s downward trajectory.

All will be revealed at 08:30am EDT.

1. Investors digest BoE’s “hammer” action

Unlike other central banks of late (RBA, RBNZ, BoJ and ECB), the Bank of England (BoE) has managed to overwhelm markets by pulling every stimulus lever available to them to counteract the shock of Brexit and in the process, made it abundantly clear that the MPC could yet pull these levers even harder.

Carney and his fellow policy makers cut interest rates to an all-time low of +0.25%. In addition, the BoE announced a range of other measures to stimulate the economy, including a +£100B scheme to force banks to pass on the low interest rate to households and businesses. It also pledged to buy +£60B of U.K government bonds and +£10B of corporate bonds. Governor Carney, in his press conference, told markets there was scope to cut interest rates further. Actions that suit the record “short” sterling positions currently in the marketplace. This has put the pound (£1.3139) on the back foot and has 10-year gilt yields plunging to a new fresh record low (+0.641%).

2. Dollar weaker ahead of jobs report

Concern that the non-farm payroll (NFP) will not be strong enough for the Fed to raise interest rates soon is leaving investors hesitant to buy the dollar.

Heading into this morning’s main event, the dollar is weak, with USD/JPY at ¥100.94, down -0.3%, and GBP up +0.25% to $1.3139 despite yesterday’s BoE stimulus announcements. Even the EUR/USD is trading up +0.2% at €1.1148.

Dollar bulls can only hope for a strong headline print to shift current market perception that there is a “low” probability of short-term rates rising anytime soon. Fed fund futures currently only see a +12% probability of a Fed hike in September and +32% of a December hike. It was only five months ago that fixed income dealers were entertaining the idea of the possibility of four-rate hikes by year-end. Expect theses odds to likely change depending on the outcome of today’s non-farm employment report.

3. Global equities get the green light

Global equities rose in overnight trading, driven by the BoE’s aggressive stimulus measures, though traders remain wary about the strength of this morning’s U.S. jobs data.

Equity bulls continue to point to central bank action of lowering interest rates and buying bonds as the primary instigator for stocks being in the black. With sovereign yields remaining so low, or negative, there is no incentive to want own debt product aggressively.

The Nikkei Stock Average was up +0.3%, with Australia’s S&P ASX/200 trading +0.4% higher. South Korea’s Kospi was up +0.7%, while Hong Kong’s Hang Seng rose +1.3%.

The story is the same in Europe ahead of the U.S open. European stocks are heading for their biggest two-day rally in three-weeks on growing confidence that central banks will keep monetary policy supportive. Market focus will be on the ECB in September.

Indices: Stoxx50 +0.3% at 2,938, FTSE +0.3% at 6,759, DAX +0.1% at 10,233, CAC-40 +0.5% at 4,367, IBEX-35 +0.8% at 8,452, FTSE MIB +0.9% at 16,391, SMI +0.3% at 8,106, S&P 500 Futures +0.2%

4. Crude rebounds from two-month low

Crude prices are well off mid-week lows, with Brent up to +$43.77 and WTI around +$41.50, however both contracts continue to see volatile trading.

The bid for the ‘black stuff’ again has come from this week’s fundamental reports.

Natural gas futures have seen very choppy trading after the EIA inventory report showed an unexpected drawdown in the amount of fuel in storage. Gasoline inventories fell by -3.3m barrels, nearly 10 times higher than expected.

Even the weather has had an impact. Forecasts of warmer weather across most of the U.S have been cited for the heightened demand, however this gains is expected to be temporary with summer demand ending shortly.

Expect the same old arguments to eventually weigh on crude prices. The overhang of crude and refined products continues to threaten to drag prices into the high $30’s a barrel territory.

Gold is currently trading atop of its three-week high on the back of a weaker dollar and uncertain timing for a rate increase by the Fed. Spot gold is trading up +0.40% at $1.361.08, its highest point since July 11. Bulls are eyeing the $1,400 handle if this morning employment report disappoints.

5. Loonies move to be dictated by Canada’s job report

Market focus is certainly on NFP, however, Canada will also be releasing is own jobs report.

Market expectations are for a solid headline print of +10k and an unemployment rate to tick up to +6.9%. Not exactly the pace of its largest trading partner south of the border, but a print that will certainly trump last months disappointing negative headline (-0.7k).

The markets loonie (C$1.3022) love affair has been highly correlated with this week’s positive run for commodity prices. If North America happens to show a positive job situation, expect USD/CAD to want to test its recent support levels below the psychological C$1.3000 handle.

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