Market Watch - Thoughts into NFP
Key Themes Friday Oct5th
Strong dollar – FOMC hike and better than expected data supporting the currency
Hawkish Fed – Could raise rates above neutral
Italy – Ongoing concerns creating a drag for the common currency
Brexit – Positive headlines this week.
Overview
Key event is US Non Farm Payroll Data where following the stronger than expected ADP data coupled with strongest ISM since 1997.
Market expectations
Non-farm Payrolls: Exp. 185k, Prev. 201k
Unemployment Rate: Exp. 3.8%, Prev. 3.9% (NOTE: the FOMC projects unemployment will stand at 3.7% at the end of 2018)
Average Earnings Y/Y: Exp. 2.8%, Prev. 2.9%
Average Earnings M/M: Exp. 0.3%, Prev. 0.4%
Average Work Week Hours: Exp. 34.5hrs, Prev. 34.5hrs
U6 Unemployment Rate: Prev. 7.4%
Labour Force Participation: Prev. 62.7%
Hurricane Florence is not expected to have an outsized impact on average hourly earnings or the headline number.
As pointed out by one economist, 'looking at the historical record of average earnings component, one can see that we have almost always, since 2010, printed 0.1% or below in the month following a print of 0.4% or larger. YoY number will see a 0.5% roll off from last September and as such a print of 0.1% will give us a 2.5% YoY print short of the 2.8% YoY expectations. A 0.1% AHE number could promptly reset the recent inflationary expectations and send yields sliding.'
Market activity.
US rates jumped significantly on Wednesday, driven by better ADP and ISM nonmanufacturing surveys, which painted a solid picture of the US labour market, which edges the FOMC to continue its path of policy normalisation. The USD too strengthened as a result pushing EUR to recent lows below 1.1505/1.1495 weekly pivot. Prices have since recovered but remain susceptible to further weakness. US10 year printed new highs at 3.215 and pulled USDJPY with it. We favour being short USD today (data dependent) considering the weekly move, looking for corrections of this week's move into the close.
This week has seen weakness in xUSD currency pairs mostly against EUR GBP and risk sensitive currencies. Thursday and Friday has seen a hiatus in the risk off move as we approach todays’ headline data. The sell-off in Italian BTPs too has halted.
Positioning.
Judging by current USD positioning, risk is for a lower number and a snap back in favour of EUR. On any USD weakness GBP will outperform EUR due to mildly positive Brexit headlines, and the background negativity to Italy
We favour being short EURGBP below the 200mda at 0.8840/45. Prices have remained bearish since the breakdown from 0.8875/60. The open and close today below the 200mda further confirms the bearish outlook. We sold yesterday as prices broke down through 0.8850. Downside targets are focused on 0.8800 and potentially 0.8725/40 marking the June low and 76% Fibo of the April upswing.
For dollar crosses and those looking to capitalise on a weaker NFP number, I see EUR, GBP and AUD being best performers.
AUDUSD too may close the week off its lows but slower Chinese growth and a neutral RBA will see prices capped at 0.7110/25 resistance, however prices currently sit below the previous low of 0.7085. A weekly close there will see further weakness to the bottom of the channel low towards 0.6825. Intraday rallies should be capped at 0.7150/45, this week’s spike highs and TL resistance.