Nonfarm Payrolls preview: 4th of July fireworks?

• Data ahead of the NFP release suggest a mediocre outcome.
• US Federal Reserve more interested in wages than in jobs’ creation.
• USD expected to have an uneven reaction across the FX board.

The US will present this Friday the June Nonfarm Payroll report. According to analysts forecast, the country is expected to have added 160K new jobs in the month, following 75K added in May. The unemployment rate is seen steady at a multi-decade low of 3.6%. Finally, wages are seen ticking modestly higher, up by 0.3% MoM and by 3.2% YoY.  

The employment report had quite a negative effect on the greenback in the previous month amid the dismal headline. However, its usual impact is quite limited in the cases the numbers don’t offer sharp divergences from expectations.

Ahead of the release, data suggest that June readings will be one of those triggering a mediocre market’s reaction. The ADP survey showed that the private sector added 102K new jobs in June, ´below the expected 140K while May’s reading was revised modestly higher, from 27K to 41K. Also, the unemployment insurance weekly claims report indicated that, for the week ended June 29, the4-week moving average was 222,250, an increase of 500 from the previous week's revised average, while the previous week's average was revised up by 500 from 221,250 to 221,750. Unemployment claims remain near record lows, but throughout June presented a modest increase.

Dollar’s reaction to possible scenarios

The Nonfarm Payroll report affects the greenback through the Fed. That means, the report is relevant only if it can twist policymakers hands, one way or the other. Given that unemployment is at nearly fifty years low and that the US Federal Reserve has already hinted a possible rate cut in the upcoming months, only a huge deviation in the headline reading could trigger wide moves.

May’s 75K was among the worst readings in the last decade. That means that, if during June the country added fewer positions, the greenback will likely collapse, as speculative interest will rush into pricing in a rate cut this July. Ahead of the release, the CME FedWatch Tool shows that chances for a 25 bps cut this month are currently at 72.4% while chances for a 50 bps cut are at 27.6%.

Back in January, the NFP job’s creation was of 304K while in April, the country added 263K new jobs. Both numbers are above average, this last at 151K per month over the last quarter. Any number above 200K will be a positive surprise, but dollar’s gains will likely be limited. It would take something beyond 280K for the headline to be enough to trigger demand for the US currency.

Wages will also have something to say. Rising salaries would mean rising inflation, and the Fed would welcome increased inflationary pressures. Currently at 3.1% YoY, the best reading this year was of 3.2%. An in-line with expected jobs’ creation but a yearly increase in wages of 3.3% or more, will also be dollar’s positive, while any number below 3.1% will be negative.

Major pairs' probable behavior

The Nonfarm Payroll report won’t overshadow the main market motor, which is concerns about a global economic downturn. Equities may be on the rise, cheering upcoming easy money from major central banks, but high-yielding currencies are among the worst performers. The US Nonfarm Payroll Report has to be highly disappointing in more than one line to trigger advances in EUR/USD and GBP/USD.

However, the report doesn’t need to impress much to push commodity-linked currencies higher, as the AUD and the CAD are already underpinned by stocks’ momentum.  One word of warning, Canada will also release monthly employment figures, and there is a more clear chance, as divergent outcomes, as it happened before, could trigger some unusual directional movement.

As for safe-havens, clearly would appreciate on a dismal report, but the most probable reaction is a limited decline in the case of an upbeat NFP. The USD/JPY pair has more room to fall than to rise.