Dollar and Risk Strategy for March Nonfarm Payrolls
• US NFPs are on tap with the Dollar showing struggle in the face of FOMC certainty and equities slipping from records
• Given the high perch of risk assets and a 100% probability priced for a hike, a disappointment would carry more impact
• Between Dollar and risk asset scenarios, USD/JPY looks to be the most potent target on a bearish/dovish outcome
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There is little doubt that US NFPs and other employment data points will draw the financial market's attention Friday, but generating volatility will require more than just showing up. The impact that fundamentals - whether particular events or broader themes - have on the market depends primarily on speculative interests. The labor statistics have easy access to concerns with considerable reach: risk trends and rate speculation. However, there is a bias on both themes which will be difficult to undermine and even more difficult to advance.
For rate speculation, the market's outlook for Fed policy has surged this week to certainty that the central bank will lift rates another 25 basis points (bps) - to a range of 0.75-1.00 percent - on Wednesday. It is difficult to bolster further certitude, but there is opportunity to lift the probability of rate hikes in subsequent meetings. Yet, with a diminished response to monetary policy from the market (dovish to hawkish) in general; that doesn't promise much in the way of market activity. The more loaded outcome is one that sees a marked reversal in the prevailing labor trends. While a disappointing payrolls, jobless rate and/or earnings print can crack conviction; it is unlikely to turn the Fed off its march to a hike unless it is profoundly bad. The same heavy skew is present for the risk interpretation. Given the loft across US equities and other favored capital-gains assets, extension offers limited scope. Alternatively, a weakened growth forecasts can catch a greater portion of the market wrong-footed in their extraordinary optimism.
Given the skewed circumstances behind these scenarios, the long Dollar or long 'risk' options are far less attractive. That said, there may be some opportunity. Majors where the Greenback is not bound by immediate resistance and is still somewhat low in its range may provide environment to amplify its own limited ambition. AUD/USD's range for example can fit that mold. For risk appetite, motivation would be even more difficult to inspire. US equity indexes are only slightly off record highs, and those assets further out on the curve that are deeper into correction (emerging market, high yield fixed income) may prove difficult to pull up. In contrast, a disappointing outcome for the data run would find a prone currency and sentiment trend. Even if we realize a disappointing outcome, it is important to be realistic of the potential it provides against prevailing trends, weekend liquidity drain and a fixation of forthcoming event risk. Yet, at the convergence of diminished rate forecast and risk trends stands USD/JPY. We run through the importance, scenario analysis and trade opportunities for the upcoming US NFPs data in today's Strategy Video.
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