It is almost that time of month again where traders look to anticipate every economic “bump” in the US economy in an attempt to gauge the US Non-Farm Payroll results. Subsequently, as the release date nears, one can feel the jitters running through the markets as participants look to cement their sentiments ahead of time. However, this time around, the results are likely to do little to produce any further upside gains for the dollar.
The past week has largely been challenging for the US dollar as it has fought a rear guard action against a broad sentiment swing. The results have subsequently been fairly negative with the Dollar Index closing well down around the 97.63 level (at the time of writing). Much of the major economic data points have been relatively flat, or at least unexciting. The ISM Non-Manufacturing PMI proved fairly stable at 53.4, as did the Core Durable Goods Orders at 1.7%. Certainly the data wasn’t terrible, so what gives given the rout in the Dollar Index?
The reality is that the perception of US economic strength largely ebbs and flows. Currently, excluding the strong US labour market statistics, there is a growing view that a recession could be coming in 2016. In fact, JPMorgan analysts have predicted a circa 30% chance of just such an event arriving on our doorstep. However, the real concern is what macro-policy tools will the central bank be able to deploy in the event of such an economic downturn.
There has also been a significant amount of talk swirling around the Fed and their potential easing options. The Negative Interest Rate Program (NIRP) discussions of last week have subsequently taken their toll on public expectations and, to be blunt, the man on the street is largely spooked by even the idea of a recession hitting US markets.
Subsequently, the Fed’s trial balloon on NIRP was more than just idle discussion and was clearly an attempt to signal future intent by using the expectations channel. Unfortunately, it has led to the belief by most major economists that the chance of a hike by the central bank in March is almost nil. In fact, this leads me to my major posit, that the NFP result is therefore likely to have little impact on the upside regardless of the outcome.
It might seem strange to imply that the much awaited labour market indicator would have little upside impact on the dollar, but please follow my logic for just a moment. Currently, US Unemployment is at its lowest rate for many years, and is actually nearing (or at!) the natural rate of unemployment. So if the current employment rates are not enough for the Fed to further hike rates, then what possible impact could a stronger than expected NFP result have on their “dot plot”. To put it bluntly, the Fed would have already hiked rates if the labour market conditions were the sole determinant of their monetary policy. Subsequently, regardless of any strong result, most traders are going to question whether it is enough to force the central bank in to action.
Conversely, if the result is below the 193k estimate, it will act as a severe damper on any boost in yields and the chance of any Fed hike in March will slip further. Obviously the net effect of any such result will be a weakening US dollar as investors scramble to reposition. Subsequently, there are plenty of reasons to view any result in a negative light and little to support any upward gains.
In fact, I suspect that the US Non-Farms are likely to provide a slightly negative surprise with the metric coming in around the 187k mark. This view is backed up by some of the data that we track, including a recent drop in the ISM Services indicator (employment section) to a horrid two year low. Coupled with sliding consumer confidence, I suspect we are therefore going to see a deteriorating NFP result in the hours ahead.
Ultimately, the Non-Farm Payrolls can be a difficult item to predict given their volatility (unreliability?) and difficulty at measuring “real” growth in the US labour markets. However, regardless of the outcome, there are plenty of reasons to position to the short side for this fundamental event.
