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Preview for December US NFPs and Implications for USDOLLAR

Preview for December US NFPs and Implications for USDOLLAR

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- EUR/USD stuck to $1.0800/50 zone.

- Chinese equities rebound after circuit breaker is removed - which makes perfect sense.

- Too strong of a print, and USD/JPY likely puts in a doji for the day.

It's the last US labor market report of 2016, and there are still a few nagging questions on investors' minds worldwide:

- As the US labor market recovery matures and the Fed lifts off, will jobs growth hold firm or sag?

- Are recent gains in employment sufficient to continue to push down the US unemployment rate or has the US economy already reached "full employment?"

- Is wage growth accelerating enough to give the Fed confidence in a later rebound in inflation?

We'll at least have a partial answer to these questions, with the release of the December US Nonfarm Payrolls report today at 13:30 GMT. Current expectations are fairly strong, with the Unemployment Rate expected to hold at 5.0%, and the headline jobs figure to come in at +200K. These expectations in context of the projected path of rate hikes this year are rather important.

Given recent commentary from Fed officials, the US Dollar may not need a blowout print (>250K) here in order for future rate expectations to firm up; currently, only two 25-bps rate hikes are being priced in next year, per the Fed Futures contract. Of course, the Fed sees four rate hikes, so someone is wrong. If the print is strong enough, it will force the market to recalibrate its expectations, proving to be a renewed bullish catalyst for the US Dollar.

For equities, the 'sweet spots' would be in the 150-175K range or above 250K. In the first scenario, investors would likely feel that the Fed would reduce its hawkish tone and suggest a more gradual path going forward. In the second scenario, investors could find relief that the US economy is still chugging along and shrugging off the marginally higher benchmark rate.

In the event that the FOMC meeting and the US NFPs prove to be supportive of the US Dollar - a 'goldilocks' report, if you will - it will likely come at the detriment of higher yielding currencies and risk-correlated assets. Any signs that the Fed could tighten policy faster than currently expected, against a backdrop of rising tensions between Iran and Saudi Arabia as well as Chinese/EM growth concerns, would seem like a caustic mix of influences for the commodity currency bloc in particular.

Read more: Preview for ECB Meeting and Outlook for EUR/USD, EUR/JPY

--- Written by Christopher Vecchio, Currency Strategist

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