September has started with a bang with emerging market currencies, commodities and stocks all selling off. More fireworks could be on the way as we head to the final day of the week with jobs data from both North American nations set to hit the wires on Friday, potentially moving the US and Canadian dollars sharply in one or the other direction.
Ahead of the release of the nonfarm payrolls data, the US dollar has traded mixed – rising virtually against all emerging market currencies and some commodity currencies, most notably the Canadian dollar, and falling against safe haven currencies such as the Swiss franc and Japanese yen.
The EUR/USD and GBP/USD, meanwhile, were both marginally higher on the week at the time of this writing. The pound has found some support on the back of positive Brexit-related headlines. Overall, the closely-watched Dollar Index was a touch lower on week, repeating its indecisiveness from the week before.
The dollar’s lack of willingness to commit in one or the other direction suggests market participants are awaiting economic data to provide direction. But could the nonfarm payrolls data cause a significant move this time around?
The US Department of Labor will report on Friday at 13:30 BST or 08:30 EDT the number of jobs added to the US economy in August, the unemployment rate, and key wage growth figures. Recently, wage growth has taken on increased importance than the actual jobs number given concerns about rising levels of inflation and in turn interest rates. So, the dollar’s response to the employment report will depend on the outcome of both the headline jobs figure and perhaps to a larger degree wage growth.
Current NFP Expectations
The consensus expectations for Friday’s headline non-farm payrolls data point to around 190,000 jobs added in August, after July’s weaker-than-expected 157,000 print. The August unemployment rate is expected to have dropped back to 3.8% from 3.9% in July. In terms of wage growth, average hourly earnings are expected to have increased by 0.2% after last month’s 0.3% increase.
Jobs Data Preceding NFP
Key employment-related releases preceding Friday’s official jobs data have shown a mixed-to-positive overall picture. The ADP employment report came out below expectations at 163,000 private jobs added in August against a prior forecast of around 195,000. Although this did trigger an immediate fall in the dollar, the greenback regained its poise against the euro and Loonie but fell sharply against the yen.
As always, it should be kept in mind that the ADP report is typically not a very accurate pre-indicator of the official NFP jobs data from the US Labor Department, and sometimes even misses the mark dramatically.
The other main pre-NFP leading indicators we have had were the employment components of the ISM manufacturing and non-manufacturing PMIs. And they both exceeded the prior readings, pointing to improved employment conditions in these important industries.
The employment component of the ISM manufacturing PMI rose two whole points in August compared to the previous month, with the PMI’s other sub-indices and headline also showing decent readings. Perhaps the most important pre-NFP leading indicator – the ISM non-manufacturing PMI employment component – was slightly less eye-catching, as it only rose 0.6 points in August. But like the manufacturing sector PMI, the rest of the report was decent.
Meanwhile the unrevised jobless claims released throughout August have averaged 213,200. This compares favourably with both the average expectations of 216,800 for the August releases as well as the average actual unrevised outcomes of 217,250 and 221,250 recorded in July and June, respectively.
Forecast and Potential USD Reaction
Given the slightly positive overall pre-NFP leading indicators, our target range for the NFP for this month is tilted to the upper half of the average expectations. With the consensus expectations of around 190,000 jobs added in August, our target falls in the range of 185,000-210,000, given the above considerations.
Though the US dollar will likely be moved by a host of other fundamental factors, any headline jobs outcome falling above this range should give the US dollar at least a short-lived boost. A result falling within the range will unlikely make much of a significant impact. And any reading that falls significantly below the range could result in a dollar pullback. Of course, the headline result, as previously noted, is not the only important data point. If wage growth figures surpass expectations, then the dollar could see a more substantial boost on higher inflation and interest rate expectations, ceteris paribus.
NFP trade ideas
In the event the jobs and crucially wages beat expectations, then we would favour looking for bullish setups on the dollar against the emerging market currencies or commodity currencies. But if the jobs data turns out to be disappointing, then we would favour looking for bearish setups on the dollar against the likes of Japanese yen and Swiss franc, which have recently outperformed amid safe haven flows.
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