Will NFP ruffle King Dollar’s rally?

Updated September 2, 2022


*Greenback at two-decade high versus euro, yen as payrolls loom

*Gold poised for third weekly drop with USD rates dominating

*Japan repeat warning on volatility as yen hits 24-year low

*US NFP has potential to push Fed towards third jumbo hike

US equities closed mixed after better-than expected ISM and initial jobless claims. The broad blue-chip S&P500 finished up 0.3% while the tech-laden Nasdaq was lower by 0.37%. The main indices closed near their highs for the day with defensives outperforming. The Nasdaq posted its first five-day losing streak since February. Asian markets are mixed this morning. European futures are pointing to a positive open after closing sharply lower yesterday. US Futures are in the red.  

USD hit a 20-year high at 109.97 as the 2-year US Treasury yield touched a nearly 15-year high. The yield of 3.551% was the highest since November 2007. USD/JPY traded to highs above 140. EUR/USD fell to 0.9910 but pared losses. GBP saw another new post-pandemic low just below 1.15. USD/CAD spiked higher to 1.3207 before pulling back as equities recovered. NZD has made new cycle lows this morning at 0.6050.

Day Ahead – US payrolls Friday

The first Friday of the month sees the US jobs report for August. The median forecast on Bloomberg is for employment growth of just under 300k. This would be much lower than July’s headline print of 528k. It would be more in line with the ADP and lower PMI employment indices data released earlier in the week.  The jobless rate is seen unchanged at 3.5% and average hourly earnings of 5.3% y/y.

Even with slowing employment growth, the labour market is still very tight. Visiting the US earlier this week, we can testify to the proliferation of hiring signs everywhere! Another increase in wage growth could seal a further 75bp Fed hike in a few weeks on 21 September. The market currently gives this a 74% chance.

Chart of the Day – USD/JPY hits the heights

This major has been tracking US yields strongly this year. Markets are positioning for more Fed rate hikes to counter surging inflation. The 2-year yield which tracks Fed funds most closely is at long time highs. Further evidence of tightness and wage growth in today’s jobs report could see speculation about a 4% peak rate. Rate cuts for 2023 could also be priced out. This is all taking place while the BoJ continues with yield curve control at 0.25%.

A solid jobs report should be enough to keep the 75bp hike priced for the next FOMC meeting. USD/JPY is heavily overbought on long-term charts. The next level of note to the upside is 142.10. Support below should be the mid-July high at 139.38. We shouldn’t discount Japanese FX intervention around current levels.  

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