Important Week For The USD Ahead Of Non Farm Payrolls

The will-they-won’t-they nature of the Fed’s decision over tapering their asset purchase plan is more attuned to a soap opera than it is to the markets and this means that US data is very much an on/off switch for USD gains or losses. Labour market and PMI/ISM numbers will be the main mover this week with Friday’s Non-Farm Payrolls announcement the most important in a fair while.

The market is looking for an expansion of around 165k in the month of May and the unemployment rate to stay at 7.5%. We believe that an on-consensus announcement is likely to prove dollar positive but the more interesting decision comes if the figure is a poor one. Obviously the USD will weaken as the market once again prices in further easing or, depending on how you look at it, a lessening chance of near-term tapering.

The interesting point will how far back a poor number sets expectations of when tapering would commence. A really poor figure this month could easily see chatter around tapering end for 6 months or so and lead to ensuing USD weakness in the aftermath.

Everything that happens this week will be incorporated into people’s thoughts of NFP and this may limit market movements before then. The announcement is due at 13.30 on Friday.

Overnight, as an extension of fears over the Fed’s commitment to further QE, Asian markets have had another torrid session. Prices were not helped by another contractionary PMI number from the Chinese manufacturing sector. HSBC’s PMI survey is more focused on Chinese SMEs and was the lowest since September.

Seemingly every other Asian economy has also posted a worse than expected figure; South Korea, China, Taiwan, Vietnam, Indonesia and India have all missed estimates. The open is likely to a negative one in stocks and should see JPY and CHF outperform in FX land.

European PMIs are also due this morning; manufacturing numbers from the Netherlands, Spain, Italy, France, Germany and Greece are all expected to show a sector in contractionary territory and emphasising the on-going recession in that part of the world. The UK’s number is due at 09.30 and is expected to show expansion for the first time since January.

The US PMI and ISMs should also show expansion for their manufacturing sector with dollar strength likely therefore in the afternoon.