Will Weak US Jobs Data Sink the US Dollar? Maybe Not.

Talking Points:

• Soft employment figures may hurt Fed rate hike bets, risk appetite alike
• Haven flows may cap US Dollar losses if employment data disappoints
• Aussie Dollar drops after RBA hints at deeper rate cuts on the horizon

Financial markets are likely to look past a lackluster economic calendar in European trading hours to focus on the much-anticipated release of April’s US Employment figures. A 200k increase in payrolls is expected, marking a slight slowdown from the 215k added in March, while the unemployment rate is seen edging lower to 4.9 percent. Equally of note, average hourly earnings are expected to have grown at a year-on-year rate of 2.4 percent, the first acceleration in wage inflation in four months.

US economic news-flow has increasingly deteriorated relative to consensus forecasts over the past month, opening the door for a downside surprise. The S&P 500 – a benchmark for risk sentiment trends – has declined alongside priced-in FOMC rate hike bets implied in Fed Funds futures ahead of the release. This suggests that markets are positioned to take the figures at face value, with a soft result interpreted as negative for risk appetite even as it cools tightening speculation.

Curiously, the US Dollar has traded higher despite the dovish shift in policy views. This opens the door for the possibility that the benchmark currency is reasserting its safe-haven credentials. While this doesn’t mean that the greenback will necessarily rise if sentiment sours on soft labor-market data, it does suggest that any kneejerk losses in the immediate aftermath of the release may prove fleeting. Indeed, with the markets-implied probability of a June rate hike at just 10 percent, there isn’t much more left to unwind. If risk-off flows overwhelm policy considerations, the benchmark currency may yet end the week on a high note.

The Australian Dollar underperformed overnight after a dovish RBA Monetary Policy Statement hinted at further rate cuts on the horizon. The central bank cut its 2016 core inflation forecast (1-2 vs. 2-3 percent previously) and warned of weak domestic cost pressures and stubbornly low price growth expectations. The currency fell alongside the 2-year bond yield, pointing to a dovish shift in policy bets. Meanwhile, the sentiment-linked Canadian and New Zealand Dollars dropped alongside equity prices while the anti-risk Japanese Yen advanced.

Are FXCM traders buying or selling the US Dollar ahead of jobs data? Find out here !

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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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