After the USD Index rallied 2.4% during the month of October, the Greenback has started the month of November with a distinctively softer tone.
The USD slipped close to 1% yesterday on a combination of firmer global equities, weaker US economic data and Mr Trump’s tweet regarding the potential resolution to the ongoing trade dispute with China. Against this backdrop, we urge Forex traders to be aware that the drivers of yesterday’s losses in the USD could just as easily reverse going into the weekend.
It’s the first Friday of the month and that means financial markets will brace for the US Non-Farm Payroll (NFP) report scheduled to be released at 8:30 am NY time.
Long-time readers of the FX UPDATE will know that we’ve always considered accurately forecasting the headline payroll number to be more guesswork than science. Today’s NFP report feature a “double hurricane” effect to calculate, which has expanded the range of forecasts from 105,000 to 235,000 new jobs for the month of October.
Last month’s headline of 134,000 was depressed by Hurricane Florence in August, which clearly prevented 1000’s of people in the Mid-Atlantic region from getting to work and being counted in the survey. Under normal circumstances, it would be reasonable to expect the headline data to rebound this month as re-construction and clean-up operations were put into place.
However, Hurricane Micheal, which hit large parts of Florida and Georgia last month, will likely have had an impact on the employment numbers during the recent survey period and could depress today’s report.
From an interest rate policy perspective, the FOMC will be focused on the wage growth component of today’s report for adjusting inflation expectations and rate trajectory into 2019. The estimates for these data are not weather related. In fact, several forecasts are looking for the year-on-year wage growth to rise above 3% for the first time since early 2009.
Considering the rise in Wednesday’s ADP data and steadily declining unemployment rate, these increases in wages should not be surprising and will likely accelerate into next year.
Unless today’s numbers are surprisingly poor, we expect to see the FOMC remain in tightening mode with a 25 basis point rise in December followed by at least three more rate hikes in 2019. As such, we consider the recent correction to be a transitory, technical reaction and continue prefer the long side of the USD against all the G-7 pairs except the JPY.
We entered the week short the EUR/USD from 1.1650. Our trade suggestion to sell the pair at 1.1470 was not hit. We suggest holding short from 1.1650 with an initial target of 1.1260 and a 1.1565 stop.
The Aussie Dollar has posted it’s strongest 2-day gain in over a year and has cleared the 30-day moving average for the first time in over 2 months. The relief rally in China and talk of a resolution to the US/Chinese trade conflict have been the primary drivers. We don’t see this move as a change in trend as the US/AUD rate differentials will continue to weigh on the Aussie longer-term.
Our trade suggestion to add to short positions at .7165 has been filled, which lowers our average short position to .7225. We suggest holding short from .7225 with an initial target of .6925 and a .7385 stop.
The USD/JPY drifted higher as equity markets in Japan stabilised this week. We still see considerable risk of more downside and prefer the short side of the pair. Our trade suggestion to sell USD/JPY at 112.70 was filled. We now have an initial target of 110.15 and a 113.95 stop.
After standing on the sidelines for over two weeks, we finally got filled on a short position in the Sterling. Our trade suggestion to sell GBP/USD at 1.2985 was filled yesterday. We suggest holding short from 1.2985 with an initial target of 1.2705 and a 1.3095 stop.
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