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The first Friday of the month is always a special occasion for forex traders as the US Bureau of Labor Statistics releases their Non-Farms Payroll report, or NFP for short. The NFP is widely considered by traders as the most important monthly data release on the forex calendar.
Reports such as this week's NFP take on increased importance because they fall just days before what traders expect will be a "live" FOMC meeting on 14 June. A FOMC meeting is considered live if the market is predicting at least a moderate probability of a change in interest rates.
Data from the CME confirms just how live the June meeting is. According to pricing in the 30-Day Fed Funds futures, CME suggests that the market is factoring a 64.2% probability of a 0.25% hike by the Fed to its official cash rate on 14 June. This compares to a 35.8% probability of a pause, and zero percent probability of a cut.
CME FedWatch probabilities as at May 30
It wasn't very long-ago markets believed a hike in June was unlikely and were even hoping for a cut by September. Compare the above graphic with that of 7 May, below. This shows how the market was placed just after the last NFP release. It is stark evidence as to how quickly and dramatically expectations of the path of official US rates have swung through May.
CME FedWatch probabilities as at May 7
A June pause went from a 91.5% near-certainty as at 7 May, to only a minor chance today. Note also how the possibility of the first rate cut in nearly two years was the odds-on favorite for September (i.e., 51% probability vs 23.3% pause and 1.7% hike), but has now slumped to almost completely off the table at just a 7.4% chance.
Indeed, markets have pushed back the possibility of the first rate cut to no earlier than December, but more likely not until January or even March next year.
What to expect from Friday's NFP Report
So, what can we expect from Friday's NFP Report? Economists are expecting a slowdown in hiring within the US economy during the month of May. The number of new jobs created is expected to fall from to 193,000 from 253,000 in April.
Given the actual NFP result has beat expectations 13 months in a row, one can't be too sure just how accurate consensus numbers are. It does however demonstrate just how well the US economy is recovering from the effects of the pandemic, and how it continues to defy not only economists' expectations, but also ten consecutive rate hikes from the Fed totalling 500 basis points.
The other factor markets (and the Fed) will be watching closely Friday is the average hourly earnings data which is also released in the NFP report. The Fed is particularly sensitive to rising wages as they believe it feeds directly into inflation, and more importantly, inflation expectations. Economists are expecting Americans' pay checks rose by around 0.3% in May, a moderate easing from April's 0.5% increase. If this occurs, then annually, wages would have risen by around 4.3% in May which is steady with April's annual rate.
King dollar reigns supreme
The US dollar has been on a rampage higher against all of the majors during May. EUR, GBP, JPY, AUD, NZD, CAD, you name it, each has melted in the face of King Dollar.
US dollar index – click to enlarge chart
Why? Well, it's all to do with those rate expectations we discussed earlier (plus a little bit of Debt Ceiling uncertainty mixed in!). The market has all but factored out the rate cuts which only a month ago it was near-certain we were going to get. As a result, we've seen a grind higher in US short- and long-term bond yields, and this is generally a catalyst for a strong currency in any jurisdiction.
US 2-Year T-Note Yield% – click to enlarge chart
It follows, a strong NFP report will only firm the case for
higher for longer at the Fed, and trigger another wave of US dollar strengthening. Watch particularly here for readings in excess of 250,000 which would be a similar margin beat compared to April's numbers.
If the NFP comes in weaker than expected, we're going to see a solid bout of profit taking in Greenback positions, but particularly in those currencies which exhibited relative strength prior to May such as the EUR and the GBP. Any NFP print in the low 100,000's would qualify here.
How to trade Friday's NFP data
USDMXN exchange rate – click to enlarge chart
As a trader, I am a trend follower first and foremost. With the US dollar having been so strong for a whole month now, there are few pairs which show a bearish trend for the USD in both the short- and long-term. The peso is one of the few exceptions, as it has maintained its dominance over the Greenback during May.
Traders can back the long-term trend (dark pink ribbon) by looking to fade (short) rallies into the short-term trend zone (light pink ribbon). If Friday's NFP comes in weaker than expected, the immediate target for the USDMXN is to the 15 May low of 17.42. This is a very important level. If you zoom out, you will see it also coincides with the major low of 17.45 from July 2017.
A break of such an important level could see a greater move lower to test support on the monthly chart around 15.54.
AUDUSD exchange rate – click to enlarge chart
On the other hand, there's no shortage of candidates to trade if the NFP report comes in stronger than expected. Take your pick from any of the majors which have all done dismally against the Greenback over the past month.
But, if you want to find a currency which was also struggling against the US dollar prior to May, then the AUD is likely your top pick. As a commodity currency, the AUD is floundering against sharply weaker metals and energy prices whose markets have responded negatively to progressively weaker Chinese economic data.
A NFP result which triggers further buying in the Greenback could really crack the AUDUSD's prevailing short- and long-term trends wide open. Here, traders have a full house of downward sloping trend ribbons, negative price action (i.e., lower peaks and lower troughs) and a predominance of black candles. The 13 October 2022 low of 0.6169 is a clear downside target, with possible some minor support at 0.6270.
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