By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
The price action in Thursday's forex market tells us that dollar bulls are banking on a good Nonfarm Payrolls report on Friday. The greenback, which traded as low as 112.05 against the Japanese yen during the NY session ended the day much closer to 113. Lower-than-expected jobless claims, a pickup in nonfarm productivity and drop in layoffs according to Challenger Grey & Christmas reinforce the view that job growth accelerated in January. However based on the Fed's optimistic view of the labor market and other economic indicators that we follow, we would not be surprised if payroll growth exceeded 200K. According to ADP, corporate payrolls rose the most since June, Challenger Grey & Christmas reported a sharp decline in layoffs, the manufacturing sector saw the strongest job growth since August 2014 and weekly jobless claims continue to fall, hovering near historical lows. Non-manufacturing ISM won't be released until after the jobs report but there's enough here to believe that job growth accelerated in January.
How the dollar responds to the jobs data, however, isn't just contingent on the level of payroll growth -- average hourly earnings, the unemployment rate and revisions are also very important. So while we expect a stronger NFP, wages, which grew faster than anticipated in December could slow in January. If Nonfarm Payrolls rise by 180K or more and average hourly earnings growth holds steady or accelerates, then the dollar will soar with USD/JPY making a run for 114. However if payrolls growth is in line or lower and average hourly earnings growth slows, the dollar will fall. In other words, there needs to be an unambiguously positive report to offset President Trump's attempts to talk down the dollar and reverse the downtrend in the currency -- and we're not sure we'll see that tomorrow.
Arguments For Stronger Payrolls
- ADP Hits Highest Level Since June
- Sharp -38% Drop in Layoffs According to Challenger Grey & Christmas
- Manufacturing Employment Rises to Highest Level Since August 2014 According to ISM
- Rise in University of Michigan Consumer Sentiment Index
- 4-Week Jobless Claims Continues to Fall, Hovering Near Historical Lows
- Continuing Claims Decline
Arguments For Weaker Payrolls
- Consumer Confidence Falls
Meanwhile, the British pound traded sharply lower against all of the major currencies following the Bank of England's monetary policy announcement. Although the BoE raised its forecasts for GDP significantly, it kept its inflation forecast unchanged. The central bank now expects the U.K. economy to grow by 2% this year, up from its previous forecast of 1.4% in November. BoE also upgraded its 2018 and 2019 forecast by 0.1% each year and said it now believes the unemployment rate could fall to 4.5%, down from a previous estimate of 5% before it starts to push inflation higher. The upgraded forecasts were attributed to a weaker currency and an adjustment of BoE's dire views of the economic damage that Brexit would have on the economy. Even with these upgraded forecasts, the BoE seemed in no rush to raise interest rates as it now expects inflation in 2 year's time (a key measure) to be slightly lower than previously estimated. The problem for the BoE is the lack of clarity on how Brexit and Trump will impact the local and global economies. More specifically, Carney said "the Brexit journey is really just beginning. While the direction of travel is clear, there will be twists and turns along the way." Investors were disappointed by his cautious tone and sent sterling tumbling as a result. Prime Minister May's white paper on Brexit did not have much impact on the market as it did not contain any specific timeline for Brexit. Instead it simply outlined the government's goals to take control of its own laws, securing new trade agreements with other countries, forming new partnership with the EU and securing the rights of EU nationals in the U.K. and vice versa. We expect GBP to extend its losses in the next 24 hours, especially if NFPs surprise to the upside.
Euro ended the day lower against the greenback but not before hitting a fresh 1-month high above 1.08. The euro got its initial boost from upbeat data with producer prices for the Eurozone rising by 0.7%, slightly higher than the 0.5% forecasted and significantly higher than the prior 0.3% reading. Unfortunately, dollar strength and EUR/GBP selling selling stripped euro of its gains. 1.08 continues to be an important resistance level for euro with German data dictating euro movements in the early hours with revisions to German and Eurozone service and composite PMIs scheduled for release.
All three of the commodity currencies traded higher against the greenback with the Australian dollar leading the gains. AUD rose by nearly 1% on the back of better-than-expected trade-balance numbers. The country reported a trade surplus of $3511m, which was much higher than the $2000m forecast. The upside surprise was fueled by stronger exports and imports. Although building approvals fell, the decline was less than expected. AUD remained in focus Thursday night ahead of Services PMI data and Chinese Caixin Manufacturing PMI. There was no data from Canada but USD/CAD stabilized above 1.3000 despite a small drop in oil prices.