- The October US Nonfarm Payrolls report is forecast to show jobs growth +200K, with the unemployment rate on hold at 3.7%, a near 50-year low.
- Rates markets are still pricing in a 25-bps rate hike in December, meaning the upside the jobs report offers to the US Dollar is low.
- Retail traders have neutralized their positioning across USD-pairs at the start of November.
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The US Dollar (via the DXY Index) is having a turbulent start to November, dropping precipitously as it appears portfolio rebalancing is underway; the DXY Index had its third best month of 2018 in October. Similarly, with US equity markets seeing their worst performances since at least September 2011, it's off little surprise that October's 'winners' are being sold and its 'losers' are being bought at the start of the new month.
Losses by the US Dollar may not run that far, however, with the release of the October US Nonfarm Payrolls report tomorrow morning. Expectations are shaping up for another 'Goldilocks' report, with jobs growth due in at +200K according to a Bloomberg News survey, and the U3 unemployment rate set to hold at 3.7%.
But the enticing aspect of the report could be the wage component. Average hourly earnings are due up +3.1% from +2.8% y/y, in what would be the fastest pace of wage growth since April 2009.
To this end, because the Atlanta Fed Jobs Calculator shows that the US economy needs to add +109K jobs for the next 12-months to maintain the unemployment rate at 3.7%, an October US Nonfarm Payrolls report that simply 'meets' expectations should keep another 25-bps rate hike by the Federal Reserve priced-in for December, and thus, stabilize the greenback.
In general, though, the risk the US labor market brings to the table is asymmetric for the US Dollar: a strong report merely confirms what is known and doesn’t impact Fed policy; a weak report could sow confusion and discord over the near-term path of interest rates.
DXY Index Price Chart: Daily Timeframe (January to November 2018) (Chart 1)
Accordingly, from this perspective, the US Dollar's bullish stature should remain intact heading into next week, despite the rebalancing-related weakness seen on November 1. After hitting a fresh yearly high yesterday, price has puled back to its daily 8-EMA, with both the 13-, and 21-EMAs just below (the moving averages remain in sequential order). Holding above the daily 8-EMA by the end of close on Friday will be crucial for the DXY Index to maintain its near-term uptrend; price hasn't closed below the daily 8-EMA since October 16.
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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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