Previously the Fed have said they won’t look to raise rates until the US reaches maximum employment, and some members want tapering to be completed before they consider raising rates. And that means the employment situation is the stumbling block towards Fed’s tightening. Until now, that is.
Fed members are coming around to a consensus, and employment is the key
Earlier this week, the Fed’s Waller said during an interview with CNBC that he can see the Fed tapering “early and fast” to be in the position to raise rates in 2022 if they wanted to. He also said an announcement to taper could be as early as September, and that employment is on track. Overnight, the Fed’s Clarida echoed calls for tapering to start in September, whilst Daly and Bullard see employment as being closer to full recovery.
In a nutshell, it appears the Fed are now trying to read from the same script to form a consensus about tapering. And another strong employment print would increase expectations for the Fed to tighten sooner, which would likely send the dollar higher.
Mixed data heading into NFP, ADP employment rings alarm
It’s been a mixed bag for the US economic data this past week. ISM manufacturing PMI fell to a 6-month low and new orders (a leading indicator for the PMI) also softened. Yet the services PMI rose to a record high and the employment index of both services and manufacturing PMI’s increased in July. However, whilst this is potentially good for Friday’s highly anticipated jobs report, another employment read raised a red flag overnight. The ADP national employment print is seen as a proxy for NFP. So that it only added 330k jobs and completely missed the 895k target yesterday has rang alarm bells.
Over the past 12-months the ADP employment print has successfully called the direction of NFP 8 out of 12 months. And by direction we mean if ADP increases compared to the prior read, so will NFP. But, as ADP was -350k lower from the July read it suggests NFP could also come in significantly lower as well. Therefore, a rough estimate suggests there is a 66% chance that tomorrow’s employment growth will fall below 662k.
And if NFP disappoints it lowers expectations that the Fed will tighten earlier, and that could send the US dollar lower and send commodities and equities higher.
What figures to look for in August’s NFP report
- The ideal scenario for dollar bulls would be to see NFP add 900k jobs (or more) and see unemployment fall below 5.9%.
- If unemployment remains stable around the 5.9 – 6.0% range around 800k jobs are added, it still keeps hopes alive for tapering to begin (or be announced) in September
- But, if NFP completely misses target only adds 300-400k jobs then it could provoke a bearish reaction for the dollar. The reaction would likely become more severe should unemployment rise to 6.0% or above.
USD/JPY in focus for NFP
USD/JPY is always a go-to currency pair for NFP, as not only are the economies intertwined but it also factors in the risk-on/risk-off play with the yen. Therefore, a strong employment report bolsters the dollar and removes safe-haven demand for the yet, whilst a weak report supports the yen from safe-haven flows and weakens the dollar.
By yesterday’s close USD/JPY printed a bullish engulfing candle on the daily chart yesterday to confirm support at 108.73. A strong NFP report would suggest this to a significant low. Price action is currently testing trend resistance on the hourly chart with support sitting around 109.40. A break above the trendline brings the 109.85 high and 110.0 handle into focus. But we may find volatility remains low as we head towards NFP so level may need to be revised accordingly for the evet.