The Non-Farm Payrolls report for June is expected to be the fourth consecutive weak report. However, there are 4 signs pointing to the other direction.
Update: the actual figure is +80K – a small disappointment – EUR/USD fallsthe actual figure is +80K – a small disappointment – EUR/USD falls
For the dollar, the story is different in the current environment. Here are 4 reasons for an upside surprise and 3 scenarios for the result and the expected market reaction.
Official expectations stand on a gain of around 100K jobs after last month’s disappointing gain of only 69K and the accompanying downwards revisions.
Fresh indicators point a better picture:
- Services employment improving: the ISM Non-Manufacturing PMI came out below expectations at 52.1 points, but the employment component rose, pointing to stronger growth in hiring. Services (non-manufacturing) is the biggest sector in the US.
- ADP better than expected: the independent report for the private sector is not always directly correlated with the private sector component of the NFP. Nevertheless, it tends to point to the trend. The gain of 176K jobs was far better than expected (+103K) and better than last month’s +136K.
- Manufacturing jobs growing: The ISM manufacturing PMI fell under 50 points – contraction zone. Nevertheless, also here the employment component remained strong, pointing to more hiring, at over 56 points.
- Jobless claims remain under 400K: The weekly barometer dropped to 374K after sitting at around 385K during June. A level of under 400K is considered sufficient for keeping unemployment from rising.
OK, so the report could exceed expectations, but how is that that good for the dollar?
Earlier in the year, better economic indicators lowered the chances of QE3 (aka more dollar printing) and strengthened the US dollar. Weak figures raised the chances and weakened the greenback.
After over a year without additional QE, the chances are becoming lower. The extension of Operation Twist at the end of June just served as a substitute for expanding the Fed’s balance sheet.
The current environment is totally different
The NFP publication comes one day after 3 important central banks introduced more monetary easing: the Bank of England announced more QE (50 billion pounds) and laid out a gloomy outlook. China surprised with a rate cut.
The European Central Bank made the move with the biggest impact: it lowered the rate to a new historic low and also cut the deposit rate to 0% – nothing. In the accompanying press conference, cut the deposit rate to 0% – nothing about the euro-zone.
In this environment, all eyes are on the US, to become a locomotive of global growth: a stronger US means more appetite for “risk” assets such as stocks, the euro, the Aussie, kiwi, pound and others. And, it lowers the appetite for safe assets such as the US dollar and the Japanese yen.
So, here are three scenarios for the immediate reaction to the Non-Farm Payrolls:
- +70K to +130K: Within expectations – lots of usual NFP madness without any big moves. This scenario has a medium probability.
- Above +130K: Good news – the dollar and the yen fall and others gain. This scenario has higher probability now. This may not last too long though.
- Under +70K: Bad news – the dollar and the yen gain on global gloom. This has low probability, but bad news can never be excluded in the current environment.
The unemployment rate isn’t expected to move from 8.2%. Unless it jumps above 8.5% or below 8%, this figure will play second fiddle to Non-Farm Payrolls.
In any case, it’s important to remember that this is a very wild event, and you should trade with care. See the 5 Notes for Trading the Non-Farm Payrolls.
Another note: Canada also publishes its employment data at the same time, so trading USD/CAD is a bit risky, to say the least.