Holiday Liquidity Drain Adds Another Complication to NFP Trading
- August NFPs are due Friday at 13:30 GMT with a consensus forecast of 180,000 jobs added to the economy
- Janet Yellen and company intensified the market's focus and speculation on rate hike probabilities
- Seasonal liquidity drain will curb the market's ability to run on significant fundamental surprise
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Trading around NFPs is difficult in the best of times - assessing market receptivity, surprise quotient, scenarios and potential with the weekend drain requires discipline and strategy. When we add conditions like the Fed returning focus to rate speculation and the extreme liquidity drain expected with the Labor Day holiday, the landscape is far more treacherous. For those intent to trade on or around this important event risk, the context cannot be left out of the assessment. Short-term conditions and a specific interpretation for Fed timing are important.
In the laundry list of statistics in the monthly labor report, the wage figures still holds the greatest potential from a fundamental perspective. While not prone to major surprises, it speaks to what matters most for the global investment community: the relative US rates for return and the aggregate influence of monetary policy for supporting speculative excess. In the Fed's dual mandate, the labor conditions are met ('quality' of employment is a legitimate talking point for economists, but not pertinent for holding near zero bound). It is inflation that is still lacking. Wage growth is the direct feed into price pressures as it funds spending potential.
As important as the probability of a September 21 FOMC hike is to the Dollar and global markets, it is a consideration suited for trend. With the holiday liquidity suppression, trends on a relative rates or even risk basis are a stretch. They can certainly be revisted when the markets fill out next week, but the limited depth and time on Friday is not particularly conducive. Therefore, the maximum potential impact is likely to come through an abrupt response via risk channels. On that front, the net payrolls figure is better suited to stirring excitement in the market rank. It is also better suited for the time frame as it also tends to fade with liquidity. With this in mind, major Dollar moves from the likes of EUR/USD and GBP/USD are more difficult to muster than short-term, technically-inclined USD/JPY, NZD/USD and USD/CHF reactions. We discuss the opportunity and risks in trading the NFPs in today's Strategy Video.
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