NFP Market Expectations
The latest Bloomberg survey median estimates suggest a 232k increase in Non-Farm payrolls, an unchanged 5.9% unemployment rate and a 0.2% up-tick in average hourly earnings
Key swing factor for any material change in FOMC positions would be evidence of heightened wage pressure
USD Upside Risks
Any payrolls print closer to 300k coupled with a lower unemployment rate should give the US dollar a renewed boost, but the real wildcard could be average hourly earnings, which have yet to show any signs of acceleration.
Indeed, a result of 0.3% or higher might start to convince markets that wage pressures are finally picking up, particularly in the wake of the higher than expected 0.7% ECI rise for Q3 reported last week.
USD Downside Risks
Consensus forecasts for Non-Farm payrolls range from 140k-300k, so any print near the lower end would probably disappoint the growth bulls assuming no offsetting revisions to prior months.
This would be magnified to the extent the jobless rate ticks up towards the higher end of the consensus range (5.8%-6.1%) and average hourly earnings come in at/through the low end of the forecast range (0.1%-0.3%)
G10 Market Reactions
USD bulls are seeking validation of the FED’s upgraded assessment that the “underutilization of labour resources is gradually diminishing”.
Those currencies which have been hit hardest post-FOMC JPY, AUD, NZD and CAD might see some relief in the downside risk scenario, but we would view any USD setback as an opportunity to re-position on the long side.
Market expectations for wages are already at the low end of expectations, so there is greater scope for upside rather than downside surprises going forward. It would appear only a matter of time before we see some acceleration in wage pressure, feeding into an initial rate hike in mid-2015. Inherent here is the global decoupling theme with respect to Interest Rate policy divergence that should work to the favour of the USD over the medium to long term.
Considering the headwinds facing other currencies, one could view USDJPY upside as limited now that the BOJ have already delivered, but it is important to balance this perspective with the possibility of a portfolio rebalancing effect that is likely to increase and keep the JPY on the defensive. Governor Kuroda has also kept the door wide open for further easing.
EURUSD should continue to be pressured by lingering expectations for more extensive ECB action. This weeks downgrade to the economic outlook in the Eurozone only adds further weight to those arguing for greater action
Commodity currencies would also be quite vulnerable in the upside risk scenario, given the sensitivity to lower oil prices of the CAD and the valuation challenges of the NZD and AUD.
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