NFP Preview: Dollar drops ahead of US jobs report

Ahead of the October US non-farm payrolls report, we have seen a massive slide in the dollar. It was only Wednesday when the Dollar Index briefly breached the August high to climb to its best level since June 27, before dropping sharply a day later on Thursday.

Ahead of the October US non-farm payrolls report, we have seen a massive slide in the dollar. It was only Wednesday when the Dollar Index briefly breached the August high to climb to its best level since June 27, before dropping sharply a day later on Thursday. The greenback’s sell-off was mainly due to several foreign currencies simultaneously finding support, rather than weakness from the dollar itself. But will the nonfarm payrolls report help to limit the downside for the buck, or will the selling accelerate in what has been a poor start to the penultimate month of the year?


Pound surges back to life on revived hopes over Brexit deal

Among the foreign currencies finding strong support this week was the British pound, which jumped on Wednesday and pushed further higher on Thursday on comments from Brexit secretary Dominic Raab, who told parliament that the UK could conclude a withdrawal agreement with the EU by November 21. Raab stated that he “would be happy to give evidence to the Committee when a deal is finalized, and currently expect 21 November to be suitable.” As my US colleague Matt Weller reported HERE, “While the deal could obviously still fall through, the inclusion of a specific date gives the statement more substance and has bolstered GBP bulls’ spirits.” Hopes that the UK and EU might strike a deal also supported the EUR/USD, which again bounced sharply from that long-term support at 1.1300. The fact that the EUR/GBP fell suggests the Brexit optimism was understand more of boost for the pound than the euro.

Aussie, kiwi and yuan jump on hopes over US-China trade deal

In addition, we saw big rallies in the likes of the Aussie, kiwi and yuan on Thursday. This was due to two main reasons. First, the People's Bank of China decided to set the USD/CNY rate lower in an attempt to boost its currency. Part of the reason for this was to stem capital outflows from China, but also to provide a good reason for the Trump administration to ease the pressure on China, which brings me nicely to point number 2: Trump tweeted earlier today that he had a "very good conversation with President Xi Jinping of China... with a heavy emphasis on Trade. Those discussions are moving along nicely with meetings being scheduled at the G-20 in Argentina." We are now just a month away from the G20 meetings in Buenos Aires, and expectations are rising that a trade deal might be achieved between the world’s two largest economies.


Focus returns to the US

Heading into Friday, the focus will shift back to the US with the official jobs report scheduled for release at 12:30 GMT or 08:30 EDT. The Bureau of Labor Statistics will publish the number of jobs added to the US economy in October, the unemployment rate, and key wage growth figures. While the headline figure will be, as always, important, the focus will be on wage growth. So, the dollar’s response to the employment report will depend on the outcome of both the headline NFP figure and Average Hourly Earnings. If they show continued strength in the US labour market then rate hike expectations for December will be boosted further, potentially leading to more losses for US government bond prices, and possibly the stock markets. The dollar may initially rise on the back of this outcome, but it will be interesting to see whether it will hold onto its gains, especially against currencies that have found strong support this week such as the pound and the yuan.

Current NFP Expectations

The consensus expectations for Friday’s headline non-farm payrolls data point to around 190,000 jobs added in October, after September’s weaker-than-expected 134,000 print. The October unemployment rate is expected to have remained unchanged at 3.8% after dipping last month from 3.9% recorded previously. In terms of wage growth, average hourly earnings are expected to have increased by 0.2% after last month’s 0.3% increase.

Jobs Data Preceding NFP: mixed

Key employment-related releases preceding Friday’s official jobs data have shown a mixed overall picture. Unfortunately we won’t have the dominant services sector PMI until after the jobs report is published. The ISM non-manufacturing PMI and its employment component will be released on Monday. Thus, we will have one major pre-NFP leading indicator missing, which makes it even more difficult to predict the outcome of the jobs report this month. Was it ever easy?

The ADP employment report came out well above expectations at 227,000 private jobs added in October against a prior forecast of around 188,000. Although very strong, it should be kept in mind that the ADP report is typically not a very accurate indicator of the official NFP jobs data from the US Labor Department.

The other main pre-NFP leading indicator we have had was the employment component of the ISM manufacturing PMI, which fell two points to 56.8 from 58.8. While still growing as the reading was more than 50.0, the rate of hiring in the sector slowed down nonetheless. Not a good sign.

Meanwhile the unrevised Jobless claims released throughout October have averaged 211,500. This has been more or less in line with the average expectations for the October releases, but marks an uptick of 6,000 from the unrevised weekly average outcome of 205,500 in September. But the October average was still lower than the average actual unrevised outcomes of 213,200, 217,250 and 221,250 recorded in August, July and June, respectively. So, despite the uptick last month, the trend for unemployment-related benefits have been falling.

Forecast and Potential USD Reaction

Given the above mixed pre-NFP leading indicators, our target range for the NFP for this month is tilted to the middle of the average expectations. With the consensus expectations of around 190,000 jobs added in October, our target falls in the range of 180,000-200,000, given the above considerations. Though the US dollar will likely be moved by a host of other fundamental factors, any headline jobs outcome falling above this range should give the US dollar at least a short-lived boost. A result falling within the range will unlikely make much of a significant impact, unless the wages show a big surprise. And any reading that falls significantly below the range could result in a dollar pullback.

NFP Jobs Created

Potential USD Reaction

> 220,000

Strongly Bullish


Moderately Bullish




Moderately Bearish

< 160,000

Strongly Bearish


NFP trade ideas

In the event the jobs and crucially wages data beat expectations, then we would favour looking for bullish setups on the dollar against currencies where the central bank is still dovish, such as the Swiss franc or Japanese yen. But if the jobs data turns out to be very poor, then we would favour looking for bearish setups on the dollar against the likes of the pound and the Aussie, given their sizeable gains this week.

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