On Friday, the latest US employment report for the month of November will be published and economists are expecting to see a more modest gain in non-farm payrolls (NFP) following sharp increases in the aftermath of the record plunge earlier in the year. But how will the dollar and stock markets react?
What is driving the markets?
The ongoing risk rally has kept the dollar under extreme pressure, causing the EUR/USD to climb near 1.22 on Thursday, while the GBP/USD threatened the 1.35 handle. Commodity dollars and emerging market currencies again pushed higher as investors sought risk. Investors are continuing to look forward to more normal times ahead with the recent development of vaccines and are ignoring the current situation with the coronavirus and virus-linked lockdowns. This means that the reaction to Friday’s jobs report is likely to be limited, unless we see a massive beat or a massive disappointment. Job gains have been falling back and are approaching more normal levels after a sharp recovery following the record falls during the height of the first wave of coronavirus between March and April.
- Analysts are expecting a headline nonfarm payroll gain of 500K jobs in November versus 638K in the previous month
- The unemployment rate is seen edging down to 6.8 from 6.9 percent the month before
- In terms of wages, well only a modest 0.1% month-over-month increase is expected
Leading indicators have been mostly poor
Some of the NFP leading indicators that were published this week disappointed expectations and suggest the November jobs report may miss the mark:
- The private sector ADP Employment report came in shy of expectations at 307K and below last month’s 404K print.
- The ISM Manufacturing PMI Employment component dropped almost 5 points to 48.4, suggesting contraction in industrial employment.
- The ISM Services PMI Employment component edged up to 51.5 from 50.1 in October, pointing to modest employment growth in service sector.
NFP trade ideas
- Given the dollar’s bearish trend, we would favour looking for bearish setups on the dollar. And with the stock markets rising, the easier trade would be to go with the trend than against it.
- Dollar’s likely reaction: The greenback could extend its declines further should Friday’s jobs report fail to match expectations. Paradoxically, even a stronger number may not provide it much support. Strength in data may keep the “risk-on” sentiment intact. However, a VERY strong number will likely support the dollar, especially against haven currencies such as the JPY and CHF, while a VERY poor number could also provide the dollar some support against the riskier currencies.
Stock market’s likely reaction: If NFP prints anything in line, slightly weaker, or stronger than expectations should keep the stock market bulls happy. However, a very poor NFP report could see stocks drop after their recent good run of form.
So, if the jobs report comes in higher than expected, then this should keep stocks and commodity dollars supported, meaning we would favour looking for bullish setups on the likes of the AUD/USD and EUR/USD, as well as the major indices. And if the jobs report is very strong then looking for long dollar positions against haven currencies such as the Japanese yen would make sense. Conversely, a very poor number will potentially support haven currencies, so in this case we would favour looking for bearish USD/JPY trades.
Clearly, the USD/JPY is the chart to watch: