Preview for July NFPs & Strategy Outlook for USD-pairs
- Data today will either provoke another downdraft in the greenback, or could prove to be the stabilizing force the US Dollar desperately needs.
- The retail trading crowd remains net-long the US Dollar, even as positioning has narrowed over the past week.
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The key issue surrounding today's July US Nonfarm Payrolls report is whether or not the US labor market is improving enough to reduce labor market slack and push up wage growth (which should help inflation), in order to justify the Federal Reserve hiking rates again before the end of of 2017.
As it stands today, markets don't think another hike is coming: Fed funds futures are pricing in March 2018 as the most likely period for the next move. Market participants will be paying attention to the wage component of the report in particular, which has been admittedly lacking gusto despite the unemployment rate holding near the Fed's defintion of "full employment" (at 5% or lower) since for October 2015.
Current expectations for today's data remain are modest after disappointing ADP and ISM Services figures earlier in the week, with the unemployment rate expected to drop to 4.3%, and the headline jobs figure to come in at +180K. Wage growth is due in around +2.5% y/y. Using a 10-year rolling model, the ADP report and the ISM Services report can account for 91% of the changes in the NFP figure (R^2 = 0.91). In sum, these proximal trackers of the US labor market correspond with pace of jobs growth between +155 to +180K.
The big picture: so long as it comes in above +75K to +125K, the jobs data will be good enough to keep the economy on track to maintain the unemployment rate (U3) at 4.3% through the end of 2017 (as per Fed Chair Janet Yellen's commentary at the end of February). The Atlanta Fed Jobs Calculator shows that the US economy needs to add +115K jobs each month for the rest of 2017 to maintain the unemployment rate at 4.3%.
Chart 1: USD/JPY Daily Timeframe (March to August 2017)
The timing of the US NFP report couldn't be more important for the US Dollar, especially now that US yields have started to turn lower again. Failure to meet expectations today could easily yield another swing lower in US yields, which would surely send USD/JPY tumbling below key support upon which it currently rests: the trendline from the April and June 2017 swing lows. The key line in the sand today is 110.15: if above, USD/JPY may have room to stabilize going forward.
--- Written by Christopher Vecchio, Senior Currency Strategist
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