NFP preview: Do payrolls matter for the dollar?

<p>All eyes will be on the US Labour Market report this coming Friday at 1330 GMT. The market is expecting a 175k increase in the […]</p>

All eyes will be on the US Labour Market report this coming Friday at 1330 GMT. The market is expecting a 175k increase in the Non-Farm Payrolls figure for January, which is higher than the 156k reported for December. The unemployment rate is expected to remain at 4.7%, and earnings growth is expected to fall back slightly to 2.8%, which would still be one of the highest levels for 8 years.

The leading employment indicators for the US lean heavily towards an even larger than expected NFP report for January. The ADP measure of private sector employment rose by 246k last month, the largest monthly increase since June 2016. Also, the employment component of the ISM manufacturing survey rose to its highest level since 2014. Unfortunately the most accurate lead indicator, the ISM non-manufacturing index, will be released after the NFP report on Friday afternoon.

The dollar and NFPs

The dollar is very sensitive to US labour market reports, but even if the headline NFP number disappoints for another month, this does not mean that the US dollar will nose-dive. On 6th January 2017, the date of the last NFP release, the dollar actually rose even though NFPs were weaker than expected (see chart below). Stronger wage data was considered more important by investors and actually lifted the greenback. It is worth remembering that labour market data and its impact on the dollar is not only determined by NFPs, wage data can override concerns about the pace of job growth as it can lift expectations of interest rate hikes from the Federal Reserve, which tend to be dollar positive.

Labour market reports can also be volatile. Historically, January can be a weak month for job growth in the US as seasonal workers get laid off after the Christmas holiday and NFPs can typically see more downside surprises compared to later months of the year. However, an upside surprise to NFPs in a month like January could trigger a dollar rally that may last for the medium-term.

Potential market reactions:

The dollar has had a bad start to January, and is on the back-foot as we lead up to this NFP report. As mentioned above, a mediocre NFP report but strong wage data could trigger a move back above the key 100.00 level and towards the 50-day sma at 101.53, while weak NFP and wage growth could see a break below key support at 99.25 – the 38.2% retracement of the April 2016 low to the early January 2017 high – which would dampen the prospects for the greenback for the medium term.

Figure 1:


Source: City Index and Bloomberg

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.