The U.S. dollar may have traded lower against all of the major currencies today and experienced its greatest one-day loss in 3 months versus the Japanese Yen but tomorrow’s non-farm payrolls report could still sink the dollar. Today’s decline in the greenback was driven by weaker data and expectations for a softer jobs report. With that in mind, the dollar had been weak throughout the Asian and European trading sessions as U.S. rates began to retreat on Wednesday. At the time, investors were skeptical about Friday’s non-farm payrolls report and disappointed by the FOMC minutes. Today, they have every reason to be worried because the latest U.S. economic reports all point to slower job growth. According to Challenger Grey & Christmas, job cuts jumped 42% at the end of the year, the largest one-month increase since September 2015. ADP reported a larger than expected drop in corporate payroll growth – 153K jobs were created compared to 215K increase in November and a 175K forecast. Jobless claims fell to 235K from 263K but the 4-week moving average is up from last month. The improvement in the non-manufacturing ISM report also contained weakness with the employment component of the report falling steeply in December. There was some good news – job growth in the manufacturing sector increased and consumer confidence is up but that’s purely attributed to Trump’s Presidential victory. As indicated in the list below, the arguments in favor of weaker payrolls exceed the arguments for a stronger one.
But we are more concerned about wages and the unemployment rate. After last month’s -0.1% decline the current expectations for wage growth (0.3%) is high. Wages have been on a downtrend and may not recover as much as the experts predict at the end of the year. The unemployment rate is expected to tick up but that will be mostly due to an increase in the participation rate. Seasonally December job growth is also generally weaker than November. While a weaker report may not deter the Fed from raising rates this year, it could delay their plans for tightening and more importantly give investors a stronger excuse to take profits on long dollar positions after the extended the move. Furthermore U.S. yields are down sharply today and there’s a good chance that we could see 115 USD/JPY tested during the Asian or European trading session pre-NFP. Here’s how the arguments for NFPs stack up:
Arguments in Favor of Stronger Non-Farm Payrolls
1. Consumer Confidence Index Rises to Strongest Level Since 2001
2. University of Michigan Sentiment Index Rises to Highest Level in 12 Years
3. Employment Component of Manufacturing ISM Index Rises to 53.1 from 52.3
Arguments in Favor of Weaker Non-Farm Payrolls
1. Employment Component of Non-Manufacturing ISM Index Drops to 53.8 From 58.2
2. ADP Drops to 153K from 215K
3. Challenger Reports Largest Rise in Layoffs (42%) Since September 2015
4. 4 Week Average Jobless Claims Rises in December
5. Continuing Claims Increase
Meanwhile the sell-off in the dollar drove the EUR/USD to 1.06. The currency pair was actually one of the day’s best performers and if tomorrow’s jobs report is disappointing enough, we could easily see a squeeze to 1.07 given the amount of short positions in the market. Data from the Eurozone was also better than expected with Germany’s construction PMI index rising to 54.9 in December from 53.9 the prior month. The German Retail PMI index also increased to 52.0 from 49.6 while EZ Retail PMI was reported at 50.4 vs. 48.6 expected. Producer prices in the Eurozone rose with inflation accelerating by 0.3%, a small surprise over the 0.2% increase forecasted. The weaker euro is clearly having a meaningful impact on the economy. With the increasing amounts of better than expected data, a NFP miss could drive the pair sharply higher. Tomorrow’s Eurozone retail sales and consumer confidence numbers are not expected to have a significant impact on the greenback.
Sterling also shot higher but the rally stalled right at the 50-day SMA. Like the Eurozone, U.K. data continued to surprise to the upside with service sector activity growing at a faster pace in the month of December. The activity index rose to its highest level in 17 months and when combined with the rise in the manufacturing index, these reports took the Composite PMI release to its highest level since July 2015. Now that the main U.K. economic releases are behind us, we expect sterling to underperform the euro, swiss franc, and other currencies outside of the U.S. dollar. Brexit remains a serious risk that will certainly return to haunt the currency.
All 3 of the commodity currencies performed well against the U.S. dollar today. The sharp rise in Australian service sector activity and the 1.5% increase in gold prices helped to drive AUD/USD above 73 cents. The New Zealand dollar on the other hand traded primarily off of anti-dollar flows with the currency climbing above 70 cents versus the U.S. dollar. Australia’s trade balance is scheduled for this evening and given the rise in the manufacturing PMI index, the risk is to the upside for the report.
Yesterday moves have taken AUD/USD and NZD/USD above their 20-day SMA and we now expect another cent recovery. The Canadian dollar also ticked up versus the greenback but its gains were the most restrained of any major currency. A large part of that had to do with oil which increased 1% today on the back of a major decline in crude inventories. US crude inventories fell by 7.1m barrels, larger than the decrease of 2.2m barrels expected. Part of the drop was offset by an increase in crude inventory at Cushing, OK. In addition to the higher than expected increase in crude inventories at Cushing, gasoline and distillate inventories also saw a much larger than expected increase as well. Tomorrow, Canada releases its employment report and international merchandise trade balance. After a few months of softer reports, we are now looking for a firmer release.