- The September US Nonfarm Payrolls report is due to show jobs growth around +200K, following the ADP Employment and ISM Non-Manufacturing/Services reports released earlier this week.
- The DXY Index technical structure has become more bullish in recent days; a retest of the August high is not out of the question.
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The US Dollar's recent rally (via the DXY Index) is taking a breather today, ready to snap six straight days of gains ahead of the release of the September US Nonfarm Payrolls report tomorrow. But with US Treasury yields across the curve pushing to multi-year highs, traders have been quick to buy the US Dollar dip. It seems that the September NFP release will do little to break current sentiment around the greenback.
Current expectations for the US jobs data remain modest, even after better than expected ADP Employment (+230K versus +184K expected) and ISM Non-Manufacturing/Services (61.6 versus 58 expected, an all-time high) figures earlier in the week. Bloomberg News' consensus forecast calls for the unemployment rate expected to drop from 3.9% to 3.8%, and the headline jobs figure to come in at +185K. Wage growth is due in around +2.8% from +2.9% y/y.
Using a 10-year rolling model, the ADP report and the ISM Services report can account for 88% of the changes in the NFP figure (R^2 = 0.88). In sum, these proximal trackers of the US labor market correspond with pace of jobs growth between +190K to +220K. The only wrinkle? There may be an impact due to Hurricane Florence, which would weigh on the headline figure.
Overall, as long as the headline for the September jobs report 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 3.9% through the end of 2018. The Atlanta Fed Jobs Calculator shows that the US economy needs to add +107K jobs for the next 12-months to maintain the unemployment rate at 3.9%.
From this point of view, the US Dollar's bullish posture should remain intact heading into next week. Yet given the fact that the labor market isn't necessarily being watched closely as the decision trigger for the next rate hike, the data may have a limited impact. Recent US Dollar gains have been divorced from more hawkish rate hike pricing, as noted earlier this week.
DXY Index Price Chart: Daily Timeframe (January to September 2018) (Chart 1)
The DXY Index's technical structure has turned bullish this week, despite weakness seen today. The DXY Index was able to retake 95.53 yesterday, prior key resistance in July and August. Price is still above its daily 8-, 13-, and 21-EMA envelope, and the moving averages remain in sequential order. Both daily MACD and Slow Stochastics are continuing to trend higher, with the former back above its signal line and the latter back to neutral. A hold above 95.53 through the end of this week would signal the potential for greater gains as the calendar moves into the middle of October.
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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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