- The DXY Index is holding near yearly lows, and desperately needs a solid US labor market reading in order to help stabilize the beleaguered US Dollar.
- A soft report could provoke a further breakdown in US Treasury yields, which would be bad for USD/JPY and good for Gold.
- The retail crowd remains net-long the US Dollar headed into the jobs report - not necessarily a good sign for the greenback.
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Trading just off of yearly lows, the US Dollar (via DXY Index) desperately needs a strong July US labor market report in order to stem its recent bleeding. The key issue surrounding today's July US Nonfarm Payrolls report is whether or not the US labor market is improving enough to keep labor market slack low and push up wage growth (which should help inflation), in order to justify the Federal Reserve's plans to begin its balance sheet normalization process and hike rates once more before the end of 2017.
The main problem for the US Dollar this summer, as it's been the case for most of 2017, is that economic data ex-labor has been so poor (especially given the recent stretch of underperforming inflation), rates markets don't think another hike is coming this year: Fed funds futures are pricing in March 2018 as the most likely period for the next move. Today, market participants will be paying attention to the wage component of the report in particular, which has been admittedly lacking gusto despite the unemployment rate holding near the Fed's defintion of "full employment" (at 5% or lower) since for October 2015.
Current expectations for today's data remain are modest after disappointing ADP and ISM Services figures earlier in the week, with the unemployment rate expected to drop to 4.3% from 4.4%, and the headline jobs figure to come in at +180K from +222K in June. Wage growth is due in around +2.4% y/y, well-below the +2.8% figure seen earlier this year, which was near a seven-year high. Using a 10-year rolling model, the ADP report and the ISM Services report can account for 91% of the changes in the NFP figure (R^2 = 0.91). In sum, these proximal trackers of the US labor market correspond with pace of jobs growth between +155 to +180K.
The big picture: so long as it comes in above +75K to +125K, the jobs data will be good enough to keep the economy on track to maintain the unemployment rate (U3) at 4.3% through the end of 2017 (as per Fed Chair Janet Yellen's commentary at the end of February). The Atlanta Fed Jobs Calculator shows that the US economy needs to add +115K jobs each month for the rest of 2017 to maintain the unemployment rate at 4.3%.
Chart 1: USD/JPY Daily Timeframe (March to August 2017)
The key US Dollar pair to watch today around the July US Nonfarm Payrolls report is USD/JPY. While other major currencies like the Australian Dollar, Canadian Dollar, or the Euro extended to fresh yearly highs versus the US Dollar this week, the Japanese Yen was nowhere to be found. Yet it now appears that a bit more disappointment on the US Dollar side of things, and USD/JPY could be on the verge of its next swing low. As we close out the week, USD/JPY price action has proven anything but stable, and the trendline from the April and June 2017 swing lows could very well break below 110.15.
Chart 2: Gold Daily Timeframe (June 2016 to August 2017)
In aggregate, we'll be monitoring the interaction among US Treasury yields, USD/JPY, and Gold today. Should USD/JPY stabilize around current levels, US yields probably won't be dropping further, and Gold will have difficulty in rallying further. Yet if a soft jobs report comes down the wire today and US yields dip lower again, USD/JPY is likely to crack through 110.00 for the week and Gold should be able to sustain its move above the descending trendline from its all-time high in September 2011, September 2012, and July 2016.
For the US Dollar today, given the overarching disappointing performance of US economic data over the past few months, there seem to be only two possible outcomes: either a soft report provokes another washout lower by the US Dollar; or a strong report causes the US Dollar to stabilize and finish the week closer to flat. Given the low volatility environment, and the fact that one report from perhaps the strongest segment of the economy over the last year won't move the needle all too significantly, it doesn't seem like "the low" will be established in the US Dollar today.
--- Written by Christopher Vecchio, Senior Currency Strategist
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