Despite many markets being closed today we see the release of US nonfarm payrolls which have the potential to cause some volatility especially since volumes will be very thin. As if volatility had not increased enough in recent weeks, for those participating in the market a word of warning that FX movements have the potential to be significant.
If yesterday’s moves are anything to go by traders were positioning themselves for a weaker than expected nonfarm payroll today, which as mentioned is released on a bank holiday for many countries. The dollar softened even though the weekly jobless data was much lower than expected dragging the four weekly average to multi-week lows and this is one of the figures that is monitored closely by the Federal Reserve. The dollar bull trade remains a very crowded one and is still susceptible to further downside correction. This is most likely to be the case if we see a sub 200k figure today (244k is expected), which could see EURUSD recapture the 1.1000 level after it breached 1.0900 yesterday. The Federal Reserve has been clear that hikes in interest rates are data dependent, in particular with respect to labour market data. We’ve seen some robust nonfarm payrolls in recent months and the headline unemployment rate has fallen from 6.7% a year ago to 5.5%. However, it is not clear that the US economy is truly ready for monetary tightening yet, especially when you consider average hourly earnings aren’t quite as robust as Janet Yellen would like and the Fed would welcome a pause in the recently relentless rise of the dollar.
Those few people that think a rate hike is still on the cards this June could be sorely disappointed and we still believe that the first hike is some way off, if at all in 2015, the latter part of the year. But just to caveat that if the data does improve significantly following a tough US winter, then this view could be adjusted.