US Dollar: US Non-Farm Payrolls (NFPs) May Determine Trend Continuation

The US dollar has fallen almost 7 percent against the euro and close to 10 percent versus the Australian dollar since the start of May as a resurgence in investor sentiment has sent comparatively “risky” assets higher. However, the greenback showed signs of turning higher this week, and with US non-farm payrolls (NFPs) due to be released on Friday morning, the news may determine whether the US dollar will continue its losing trend or if risk aversion will help spark a true rebound in the currency.

[B]What is the Market Expecting for May Non-Farm Payrolls?[/B]

Arguments for an Improvement in Non-Farm Payrolls [/B]

  1. Initial jobless claims have gradually fallen from the March high of 674,000 down to 621,000
  2. Continuing jobless claims dropped for the first time since December from a record high of 6,750,000
  3. ADP employment change fell in line with expectations by 532,000, the least since October 2008.
  4. Challenger job cuts rose by 7.4% from a year ago, the lowest reading since February 2008, when cuts fell 14.2%
  5. ISM services, manufacturing employment indices are still well below 50, but both have either improved or held steady
  6. Conference Board, University of Michigan consumer confidence both surged to the highest since September 2008

Based on both a Bloomberg News poll of economists and a variety of leading indicators, Friday’s release of US non-farm payrolls (NFPs) is likely to show job losses for the seventeenth straight month in May, but the rate of decline is anticipated to slow. At the time of writing, Bloomberg News was calling for NFPs to plunge by 520,000, but looking at the range of estimates, economists are anticipating that NFPs could fall anywhere between 450,000 and 600,000. Based on the improvements we’ve seen in leading indicators like initial jobless claims, consumer confidence, and the employment components of ISM non-manufacturing, we expect that NFPs may drop somewhere in the range of 500,000 to 540,000.

That said, the steady accumulation of job losses does not bode well for economic growth going forward and indicates that the unemployment rate will continue to climb. In fact, for the May reading of the rate is projected to rise to 9.2 percent, matching the September 1983 high, from 8.9 percent. At the same time, preliminary estimates of Q1 GDP for the US showed a 1.5 percent jump in personal consumption, after spending contracted for the previous two quarters, suggesting that aggressive discounting by retailers has been able to counter the impact of falling incomes, to a certain degree. In coming months, it will be important to get a sense if the rising optimism amongst consumers – which has been focused more on the economic outlook than current conditions – can remain robust even if growth doesn’t bounce back in the second half of the year.
How Will the US Dollar React?[/B]

In preparation for trading this top event risk, we need to put it into the context of everything else that is going on in the markets since there is so much happening. On Thursday morning we saw a series of policy announcements from the Bank of England, European Central Bank, and Bank of Canada, but we’ve also seen that risk trends are still the primary driver of price action, as the US dollar tends to fall when investor sentiment builds and usually rallies amidst market-wide risk aversion. Thus, it will be necessary to keep this correlation in mind when trading around the time of the release of NFPs.

From a technical perspective (see charts below), the daily charts of the US dollar index shows that the currency bounced on Wednesday from key support at the 61.8 percent fib of 71.32-89.62 at 78.29, but on Thursday, price subsequently backed off from former support at 79.80 (the May 22, 25 lows). These two levels - 78.29 and 79.80 - will essentially become “lines in the sand” on Friday. Indeed, daily RSI for the index rose from overbought levels on Thursday, but we also saw this occur last week, suggesting this is a weak bullish signal.

Accordingly, we have some clear “lines in the sand” for EUR/USD as well thanks to a rising channel formation that has contained the pair throughout the past month or so. Currently, the lower bound sits near 1.4000/50 (supporting trendline and May 22, 25 highs) and the upper bound rests at the June high of 1.4338, but ultimately, we may only see a true break lower of NFPs prove to be disappointing and spur demand for safe haven assets like the US dollar. Indeed, the trend is still very much in favor of EUR/USD strength and broad US dollar weakness.

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