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Preview for NFPs as US Dollar Starts to Lose Traction
- DXY Index lost its range support at 102.05 yesterday; could fall as low as 100.50/55 in the coming sessions.
- Expectations for the December NFP report are muted (+175K) after a weak December ADP Employment report (+153K) yesterday.
The key issue surrounding today's December US Nonfarm Payrolls report is whether or not the US labor market was able to maintain its steady progress after the US elections. Yet it's difficult to see how one report could boost markets from already rich expectations for 2017: two rates hikes are already priced in, with a third sitting on the fringe for December.
Instead, after a string of mediocre data to start the year - in particular, the rather chill +153K reading on the ADP Employment report for December - expectations for a strong jobs report (>+200K) have evaporated. Current expectations for today's data are modest (on the cooler side of 'Goldilocks,' but not too cool), with the Unemployment Rate expected to edge higher by one-tenth to 4.7%, and the headline jobs figure to come in at +175K.
It's important to keep in mind that while the trend of +200K jobs growth per month has recently been a psychological level for markets, but Fed leaders and centrists (the Goldilocks of the Fed; not too hawkish or too dovish) tend have another number in mind. In October 2015, San Fran Fed President John Williams wrote in a research note that he believed growth of +100K jobs per month was enough to sustain the growth in the labor force and maintain the current unemployment rate. In December 2015, Chair Janet Yellen reiterated this same view. By the Atlanta Fed Jobs Growth Calculator, assuming a 4.8% longer term unemployment rate, the economy only needs +122k job growth per month to sustain that level.
It thus seems that the risk to the US Dollar is asymmetrical today. Given how quick markets have been to price in optimism over a steeper Fed rate hike path, and the ensuing positioning overload in US Treasuries - the CFTC's COT report shows speculators are holding their largest net-short position ever - the most likely outcome on a report that simply 'meets' expectations is one that produces more of what we've seen this week in markets: profit taking in USD longs; Gold prices squeezing higher; and underpinning it all, US Treasury yields moving lower.
Barring a blow out to the topside (>+200K), it's tough to see how the December US NFP report can result in renewed bullishness for the US Dollar. In context of the recent break of the range in DXY Index (scenario b from yesterday), a fundamental excuse like a modest NFP report may be all that is needed to end the US Dollar's first week of the year with a 'whimper' (certainly not the 'bang' it appeared to be gearing up for on Tuesday morning).