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RESEARCH NOTE: May Non-Farm Payroll Preview
Brian Dolan, Chief Currency Strategist
On Friday, June 6, May NFP data will be reported at 0830ET/1230GMT. Consensus market expectations are for a -60K change in NFP (prior -20K) and an increase in the unemployment rate from 5.0% to 5.1%. The ADP national employment report showed an unexpected increase of +40K private sector jobs, but the ADP has been overshooting NFP by an average of +80K over the past six months, so I am not factoring in the ADP reading. However, weekly jobless claims leading up to the NFP survey week of May 12, while staying relatively elevated, did not deteriorate in any significant sense. This suggests the market's consensus is probably in the ballpark and I think a reading of -30K to -80K will be interpreted as meeting expectations. Such a result would also be encouraging to the 'glass is half full' crowd, those arguing that the US downturn will be relatively mild, and is likely to spark a positive USD reaction. A NFP job loss of greater than -100K is likely needed to rekindle fears of a deeper US downturn and shake up expectations for higher US rates later this year, triggering a more negative USD reaction. A better than consensus NFP reading, better than -30K, is likely to trigger an outsized USD positive response, as optimistic outlooks are vindicated and higher US rate expectations are cemented.
There is another dimension to tomorrow's NFP report that will make the market response and the USD reaction even more significant than what the data suggests about the US economic outlook. That dimension is the USD itself. Fed Chair Bernanke in comments this week correctly noted that USD weakness is contributing to inflation pressures. To effectively combat inflation, he intimated that the USD was being viewed as a policy lever, leaving the impression that further USD weakness might be met with an interest rate response or market intervention coordinated by the US Treasury. While both those prospects seem a stretch given ongoing US economic weakness and perceptions that Treasury still does not support market intervention, market players have noted the exceptional nature of the Fed Chair citing the weakness of the USD. That in turn has caused many to recalculate that the prospects for continued USD weakness are now diminishing. With the market pricing in expectations for a US rate hike, potentially as soon as September, asset managers are beginning to exit short-USD bets and put on long-USD strategies. Since Bernanke's comments, the USD has strengthened markedly across the board, notwithstanding today's ECB surprise knocking the buck lower against the Euro. If such a cyclical move back into the USD is in fact unfolding, post-NFP volatility provides an opportunity to buy USD at levels that might not be available otherwise. Such a flow effect is most noticeable when 'worse than expected' data fails to see the USD react as negatively as would normally be expected. Traders should be very alert to the USD failing to weaken significantly on weaker data, or failing to sustain such weakness for more than an hour. Should the USD manage to make gains on 'weak' or 'weaker than expected' NFP, it is likely a significant sign that the USD is in the process of turning a major corner toward recovery and augurs additional gains in the weeks ahead.
To provide you with some framework to gauge the immediate market reaction to the NFP report (post-release price gap), I provide below my expectations for how much USD/JPY and EUR/USD should initially move over a range of NFP outcomes.
| NFP headline | EUR/USD initial reaction (in pips) | USD/JPY initial reaction (in pips) |
| -130K to -180K | +80 | -100 |
| -80K to -130K | +60 | -70 |
| -30K to -80K | +30 | -30 |
| -30K to +20K | -40 | +50 |
| +20K to +70K | -70 | +90 |
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
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