The Dollar Strategy for NFPs Has Changed Due to the FOMC
- The US labor data for April is due Friday at 12:30 GMT with NFPs expected to rise by 190k and a jobless rate of 4.6%
- These series are well-known for producing volatility, but its trend capacity this round will be seriously stifled
- Given a high level in risk trends and over 90% probability of a June Fed hike, the biggest impact is from a weak NFPs
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Instead of charging the market and providing some much needed trend to key markets, the FOMC decision Wednesday only further complicated the trading landscape. Will the NFPs release Friday prove any different? Every month, the US labor data run - often referred to by only the nonfarm payrolls figure - carries significant sway over speculation. That said, its realized impact on the market varies by the outcome of the data and the shape of the trading landscape it is released into. For this round, anticipation is mixed with a remarkably prevalent complacency. Price action is exceptionally restricted and the central bank's policy dictation earlier in the week have created a more complicated scenario table for how this event risk can shape the Dollar and US-based assets moving forward.
In recent years, there has been a tradeoff where the labor data could carry more weight on a short-term basis or through the expression of a prevailing trend. Further, the emphasis would either rest upon the headline-friendly payrolls outcome or the more 'qualitative' figures in unemployment, participation and average hourly earnings. In this go around, it is more likely to be the NFPs impact on the short-term that carries the greatest potential. Following the central bank's decision to keep its course setting - with the balance of confidence and restraint that represents - the market leverage its expectation of a rate hike at the June 15th meeting to over 90 percent. That said, the Fed's own consensus of a two additional hikes through 2017 was still seen as a 50/50 outcome at best. There is plenty of room to change the tide on rate speculation through the year, but it is much more challenging for this event risk top stretch that far. It can more readily alter speculation of the immediate future. Yet, there is little further hawkishness left unaccounted for in the market's outlook. There is much to lose. That means a bearish outcome carries far greater impact if realized.
With the asymmetrical scenarios, the Dollar bearish outcome - while no more probable - seems to carry much greater potential. A breakdown for the DXY Dollar Index or bearish response for some of its crosses may offer initial traction given the intensity of the currency's range. On the other hand, even a limited response scenario from a hawkish/bullish scenario may better cater to the current standing at the bottom of the tight range (or upper bound of the rising EUR/USD channel). And, while the risk impact has proven more difficult to motivate in recent months and years given the degree of complacency and the gradual improvement of the economy's trend; the same extreme complacency behind the S&P 500 may provide another launch pad for a sharp reaction to any surprises for this data. Here too, there is a skew in potential. With broader markets already richly priced, the deeper potential rests with disappointment, but the tension in the range may give way to a quick move in either direction. We discuss the skew behind this data along with the opportunities and risks it creates in today's Strategy Video.
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