Investors will have to get past Friday's US jobs report before they can turn their minds to hunting for Easter eggs. Non-farm payrolls (NFP) are expected to rise by 236,000 for the month of March when the data is released at 8:30am New York Time Friday morning.
This is a cooling of the surprise gain of 311,000 jobs created in the month of February. That data, released on March 11, triggered a sharp sell off in US stock indices as it stoked fears strength in the American labor market would likely force the Federal Reserve to return to 50 basis point interest rate hikes. Prior to the February jobs report, the Fed had slowed from a 50 basis point hike in December, to 25 basis point hikes in February and March.
History shows the banking crisis, which was only just breaking news at the time of the last NFP release, has caused markets to pivot 180 degrees from expectations of higher rates to significantly lower rates in the near future. Indeed, markets are now just favoring a pause from the Fed when it next meets in May. I say "just" because the futures market is showing a 57% chance of a pause versus a 43% chance of another 25 basis point hike.
So, Friday's NFP is what we call a "live" data point.
A good guide to Friday's result is the private sector ADP Non-Farm Employment Change data released on Wednesday. It surveys over 25 million American workers and showed private businesses added 145,000 jobs in March. This was below market expectations for an increase of 208,000 jobs, and also well down from February's 261,000 increase. Note however, the February number was revised higher from 242,000.
Prior to the ADP numbers, the market was forecasting closer to 250,000 new jobs for the NFP. It shows markets are positioning for a weaker report. Interestingly, a weaker report may not be a bad thing for stock and bond markets, as any data which points to slower US growth will only firm the market's opinion the Fed will pause in May.
Should we instead see the NFP number come in closer to 300,000, I expect both stocks and bonds are going to sell off sharply. For now at least, bad news is good news when it comes to the US economy.
US dollar weakness likely to persist
The US dollar has been trending lower against each of the major currencies since news of Silicon Valley Bank's demise broke on 9 March. As expectations in the market switched from Fed hikes to cuts before the end of the year, short term market rates on US Treasuries have plunged. The 2-Year T-Note yield, for example, dropped from over 5% to trade at just 3.76% yesterday.
The sharp decline in the yield of safe-haven US Treasuries has diminished the dollar's attractiveness as a holding vehicle among international fund managers. Even worse for the dollar, the path of rates in other major currency jurisdictions such as the Eurozone, the United Kingdom, and Switzerland remains skewed to the upside. Really only Canada and Australia, whose Central banks chose to pause their respective prevailing rate hike cycles at their most recent meetings, have a similar benign outlook to the US experience.
US dollar index - click to enlarge chart
It follows, if the NFP comes in weaker than expected, particularly in low 200,000's – or even in the high 100,000's – the dollar will continue its downtrend against the majors. In this scenario, expect more acute weakness against the Euro, Pound, and Swiss Franc. A hotter than expected print will on the other hand likely trigger a rebound in market rates and drive the US dollar higher.
How to trade this week's NFP data
The currency pair I suggest traders pay the most attention to is the GBPUSD, or "Cable" as it is commonly known. The Cable has reversed the downtrend which plagued it for most of 2022, rebounding strongly against the greenback between October and December before consolidating for most of the first quarter of 2023.
GBPUSD "the Cable" exchange rate – click to enlarge chart
UK's consumer price inflation (CPI) remains stubbornly high. The last reading for February was 10.5%, up from January's 10.4%. The UK economy is yet to display signs of consistent disinflation which is a feature of the US CPI data this year. The market continues to price in the probability of at least one more 25 basis point hike in official rates from the BOE, most likely in May, and then for rates to remain relatively stable for the remainder of the year.
Contrasting this, markets are pricing in cuts from the Fed, some suggesting as much as 50-75 basis points before the year is out. Forex traders are always seeking superior yields, and the outlook for interest rates on both sides of the Atlantic should continue to push capital away from the Greenback and towards the Pound.
Trade over 40 foreign exchange pairs including the Cable long and short with ThinkMarkets CFDs. Contact us today for more information, or open a trading account.
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