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Comment: Strong US non-farm payrolls could bring September rate hike and euro low

Date: Tuesday 02 Jun 2015

Comment: Strong US non-farm payrolls could bring September rate hike and euro low

The May non-farm payrolls are due on Friday and should determine the US dollar's fate until the next FOMC meeting scheduled on 16 and 17 June, writes analyst Ipek Ozkardeskaya at London Capital Group.
Following Fed chair Janet Yellen's most recent speech, market expectations for the first Fed rate hike have been brought forward to September/December 2015.

The sovereign bond markets remain reticent about pricing in an earlier move, with a slightly higher than 50% chances given to a rate hike at December's meeting.

According to market surveys, expectations for US labour market's performance last month are very much balanced.

The US economy is expected to have added 228,000 new non-farm jobs during May, a touch higher than 223,000 in April; the unemployment rate is expected to stay put at 5.4%.

Looking backwards, since March 2014 the NFP have successively printed above the psychological threshold of 200,000 for twelve consecutive months. During that time span, on average the US economy added 252,000 jobs each month.

The most recent disappointment was in March 2015, when the labour market created an unsatisfactory 85,000 jobs, which traders put down to mediocre weather conditions in the US and the drop in oil prices.

But despite the relatively volatile nature of non-farm readings, the trend in the US jobs market remains positive.

NFP effect on rate hikes and the US dollar

Considering different scenarios, any reading between 200,000 and 250,000 should help whet investors' appetite for the US dollar and help keep alive hopes that the 0.7% quarter-on-quarter (annualized) contraction seen in US gross domestic product in the first quarter will be followed by a rebound in economic activity in the second quarter.

The Fed will then be given a good reason to proceed with the first rate hike before the end of the year.

A print exceeding the average of 250,000 should bring a potential September US rate hike back on the table, lead to an acceleration in US dollar purchases and send the euro packing back to its to twelve-year lows around 1.0450/1.0500 against the dollar.

What about a low NFP?

Although it is a low-probability scenario, a reading below 200,000 would only serve to revive anxiety about the health of US economy and see a waning appetite for US dollars across the board, pushing traders back into carry trades in other currencies, with the Aussie dollar being among the most favoured destination.

Aussie traders should, then, consider a bounce back to the 80 cent mark, while the Japanese yen should secure the 120 base against the greenback.

In the cross currency market, an interesting trading opportunity would also present itself in long euro positions against yen targeting a 50% retracement of the December 2014 to April 2015 sell-off.

In any case, the potential for the first Fed rate hike to come before the end of 2015 would still exist, as the US central bank seems somewhat concerned about the current historically-high equity prices. However, should the payrolls report miss the 200,000 mark then forecasts for the pace of policy normalisation could take a serious hit.

Ipek Ozkardeskaya is a Market Analyst at London Capital Group.

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