Market Alert: NFP report crucial for the dollar

Ever since the Fed hinted at rate cuts in June the US dollar has been mostly gaining. Could this winning streak be finally reversed? We explain the USD gains and take a look at the incoming report in this analysis.  

Why the US dollar has been so strong?

The US Fed delivered on its rate cut promise in July and markets see more cuts going forward but that did little to undercut the dollar. It’s possible to explain some of this USD strength. In Europe, Brexit weighed on the pound and the euro to some extent and there’s a lot of talk not only about rate cuts but restarting the QE. In Asia depreciating yuan exerted a downward pressure on other currencies if they wanted to remain competitive versus China. Bond and gold rally drew inflows to the US dollar where yields are the highest in G10. On the other hand, the business activity data has shown that the US outperformance has already vanished and plunging new export orders hint that strong currency could be at least partially to blame. From that perspective, a strong labour market could be the last harbour of the strong US dollar.

NFP could swing the consensus at the FOMC

Markets see high probability of rate cuts at EACH of the 3 remaining FOMC meeting this year. That’s a high bar and it’s far from decided: there are some voices at the FOMC that do not see any need for more cuts and strong labour market is one of the arguments. While the business surveys have deteriorated recently, employment gains have been fairly stable and the hawks at the Fed may want to see this change before they vote for more cuts and validate market expectations. Therefore, weak NFP could be a real game changer for the greenback.

What to expect from the report?

The NFP was mixed last month showing employment gain of 164k and a similar number is expected this time around. However, one might notice that August and September were the two weakest months in 2011-2018 period so there seems to be a downside risk. On the other hand the ADP report for August was above expectations at +195k. Having said that, the NFP is a very volatile number and anything is possible. The reading below +100k would be a major disappointment.

August and September were “low” months between 2011 and 2018. Is this a warning sign ahead of the NFP report for August? Source: Macrobond, XTB Research

USDIDX (CFD on USD index futures) is a good instrument to gauge overall performance of the greenback as it decreases relevance of external factors (think ECB, Brexit) to some extent. While the index has been in uptrend for a long time, we have seen many deep corrections and with that in mind it’s worth to notice the latest sharp reversal from the upper. The first relevant support is 97.60.  (Source: xStation5)

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