USD: NFP unlikely a game-changer
The dollar has remained close to its recent highs, feeling very little pressure from the recovery in risk assets seen yesterday. Today, the futures market points to another negative open in the US stock market, with the highlight of the day being the release of June’s nonfarm payrolls in the US. Our economics team expects a 270k increase in the headline employment figure (in line with consensus), with the unemployment rate staying at 3.6% and wage growth continuing to tick higher. This would mark a slowdown in hiring compared to May, warranted by rising recession fears and higher rates, along with the longstanding issue of a lack of suitable workers despite a large number of job openings.
We think, however, that only a very weak reading today can trigger a sizeable re-pricing in the market’s Fed rate expectations given the Bank’s explicit strong focus on fighting inflation and CPI numbers next week will surely carry a much bigger weight. The Fed minutes released this week also seemed to point to rather muted concerns about the worsening economic outlook, and we heard further support for a 75bp increase in July by FOMC members Christopher Weller and James Bullard. Today, we’ll hear from New York Fed President John Williams.
The Fed's underlying narrative should continue to provide some support to the dollar, which incidentally seems to embed a larger risk of a global slowdown now, and likely some growing divergence between the economic outlook for North America and the rest of the world (Europe, above all). We expect the dollar to consolidate around current levels today, and DXY to close the week around 107.00.
Elsewhere in the G10, yesterday’s tentative recovery in commodity currencies – fuelled by news of further stimulus in China - has lost some steam during the Asian session: we continue to see quite a challenging environment in the short-term for all high-beta currencies. We have just published our preview of the RBNZ meeting in New Zealand next week.
The yen has had a very strong week in the crosses, and saw some further safe-haven flows this morning on the grim news that former Japanese PM Shinzo Abe was shot in Tokyo. JPY strength still needs to be mirrored in a weaker USD/JPY (some cooling off in the Fed’s rate expectations may be needed there), but Japanese authorities are likely welcoming the near 2% increase in JPY TWI since the start of July.
|