• Joel

USD Risk Incoming, Crucial Jobs Data Ahead

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Its been another choppy week for USD, with DXY setting fresh multi-year lows of under 92.00 on Tuesday (coinciding with EURUSD briefly popping above 1.2000), before reversing course back to just underneath the 93.00 mark as of today.

Two main reasons have contributed to the bucks recovery;

Reason 1) ECB sounding more dovish

The ECB, clearly agitated by the recent rise in EUR (remember, the Eurozone is a big exporter and is thus a very trade dependent economy, hence why a stronger EUR might be seen as bad for the Eurozone) has begun “verbal intervention”.

On Wednesday, ECB Chief Economist Philip Lane noted recent EUR appreciation and said that, while the ECB does not specifically target FX rates, the rate of EURUSD does matter to its policy making decisions. This reflects the fact that a stronger EUR does have notable disinflationary/export reductive effects (the Eurozone is already in deflation in August, with prices falling 0.2% on a Y/Y basis).

This morning an FT piece was released in which numerous ECB members reportedly told the FT that they are concerned about EUR appreciation and might have to downgrade their inflation forecasts at the next ECB policy meeting (next Wednesday).

Lower inflation forecasts (especially when that means the ECB expects inflation to miss it just below 2% inflation target by an even greater margin) raises the risk that the ECB might hit us with some more stimulus (likely in the form of more QE via a PEPP expansion, but could be rate cuts.

This has weighed on EUR over the past two days, giving USD a helping hand.

Reason 2) Improving US data

While Eurozone data has been worsening (August PMIs, August CPI and today, July retail sales), US data has looked better. Indeed, August ISM manufacturing PMI on Monday came in better than expected, as did August Markit PMIs just under two weeks ago and July factory orders. Meanwhile, today’s ISM non-manufacturing data was in line with expectations, but the prices paid sub-index rose to its highest since November 2018.

The narrative that the Eurozone economic recovery had been outpacing the US appears to have reversed course in August – this was one factor underpinning the rise in EURUSD, hence EURUSD weakness in wake of this data.

Tomorrow’s jobs data will make or break reason 2)

However, the US economy’s “strong” performance in August is not a done deal. We are still missing crucial hard data, most important of which is tomorrow’s NFP data.

Heading into tomorrow’s crucial data, the signs are not exactly looking great. Both ISM PMI metrics had employment sub-indices of under 50 (implying that employment is in contraction in the US economy).

ADP National Employment data on Wednesday also missed expectations, coming in at 428k (exp. 950k).

ADP is a large US payroll company that produces its own estimate, based on its own inhouse data, on how many jobs the US economy would have added or lost on the month.

Since the Covid-19 crisis began, the ADP number has been missing the official NFP number by over 1mln each time, but the magnitude of each miss has been shrinking in recent months, so this month’s ADP does add downside risk to tomorrow’s NFP number in my book.

Markets expect NFP data to show 1.4mln jobs created, consistent with a drop in the unemployment rate to 9.8% from 10.2%.

Should we see a disappointing number, say similar to the ADP number, this will undermine demand for USD and we might see the gains of the last two days eroded. Should the data come in strong, the 93.00 level is there for the taking for DXY. 


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