Will Non-Farm Payrolls Take USD/JPY Above 108?

The U.S. dollar traded higher against all of the major currencies today despite softer U.S. data. The only thing that mattered were stocks which extended its gains after yesterday’s dramatic reversal. USD/JPY hit a fresh 1-month high and is now eyeing 108. While the pair could get close to that level during the Asian or European trading sessions, its unlikely to break it ahead of Friday’s non-farm payrolls report. Having just raised interest rates in March, this upcoming jobs report won’t have an immediate impact on Fed policy as investors are not looking for another rate hike until June at the earliest. However non-farm payrolls is always an important release and the changes expected over the previous month are significant enough that a surprise in one direction or another is all but certain. Economists are looking for job growth to slow significantly, which would be negative for the dollar but they also anticipate an improvement in the jobless rate and stronger average hourly earnings growth. Last month’s NFP report beat expectations by more than 100K so revisions are also in focus.

Taking a look at other recent data, there are more arguments in favor of a softer than stronger jobs report but with the employment component of non-manufacturing ISM rising in the month of March, the headline number could beat especially if prior job growth is revised lower. Here’s how the arguments for NFPs stack up this month:

Arguments in Favor of Stronger Payrolls

  1. Employment Component of Non-Manufacturing ISM Rises
  2. Rise in University of Michigan Consumer Sentiment Index
  3. Continuing Claims Drop to 40 Year Lowing ISM

Arguments in Favor of Weaker Payrolls

  1. Employment Component of Manufacturing ISM Drops
  2. ADP Reports Smaller Increase in Private Payrolls
  3. 4 Week Moving Average Rises to 228K
  4. Drop in Conference Board Consumer Confidence Index
  5. Challenger Reports 39.4% increase in Layoffs

With this in mind, we are looking for 5 things in tomorrow’s labor report –

  1. Non-Farm Payroll Growth
  2. Revisions to Last Month’s Report
  3. Change in Unemployment Rate
  4. Average Hourly Earnings Growth
  5. Participation Rate

Considering the recent strength of the dollar, investors are positioning for a stronger labor market numbers but there’s also plenty of room (in wage growth and the jobless rate) for a downside surprise, which makes trading NFP this month is particularly difficult. At the same time, it means there should be big reaction depending on the direction of the surprise. If payrolls exceed 200K, wage growth rises by 0.3% and the unemployment rate falls as expected, USD/JPY will break 108 easily. However if wages rise by only 0.2%, the unemployment rate holds steady and payrolls are 200K or less, we should see USD/JPY below 106.80.

The Canadian dollar will also be on the move tomorrow with Canada’s labor market report scheduled for release at the same time as NFP. USD/CAD is trading lower ahead of the data as investors hope for a rebound in full time job growth that will drive the net change higher. Although Canada’s trade deficit widened more than anticipated, the Canadian dollar ended the day higher against most of the major currencies as investors look forward to a NAFTA deal. According to Prime Minister Trudeau, NAFTA talks are moving forward in a significant way and there’s talk that a deal could be announced at a regional summit in Peru next week. The Australian and New Zealand dollars on the other hand traded sharply lower despite stronger Australian economic reports. Both the trade balance and service sector activity improved but the only that mattered was the recovery in the U.S. dollar. At this point, how AUD/USD and NZD/USD trades hinges on NFPs.

The sell-off in euro and sterling on the other hand was supported by data. German factory orders and Eurozone retail sales grew less than expected in the month of February. Although producer prices increased, this uptick was offset by the other releases and downward revisions to Eurozone PMIs. The worst performing currency today was sterling, which isn’t a surprise considering that service sector activity slowed alongside manufacturing and construction. All 3 UK PMI reports fell for the month of March and these declines took GBP/USD below 1.40. If the U.S. dollar rises on the back of a stronger labor market report, GBP/USD could extend its slide down to 1.39.