Stronger NFP report reinforces USD rebound ahead of US election

USD 1: Strong US payrolls report solidifies expectations for 25bps Fed cut 

The US dollar has continued to trade at stronger levels following the release of the much stronger than expected nonfarm payrolls report on Friday. It has helped to lift the dollar index back up to the 102.50-level as it moves further above the year to date low of 100.16 set at the end of last month. It has been the strongest rebound for the US dollar since the recent bearish trend started in July. Last week’s US dollar was reinforced by the latest nonfarm payrolls report for September which has given market participants more confidence that the Fed will slow down the pace of easing by delivering a smaller 25bps rate cut next month just after the US election. The US rate market has been scaling back expectations over how aggressive the Fed rate cut cycle will be, and is currently pricing in around 25bps of cuts at both remaining FOMC meetings this year in November and December. The implied yield on the Fed fund futures contract for December of next year has risen by around 57bps to 3.35% from the low point set last month.

The further hawkish repricing of Fed rate hike expectations was supported by the release of the nonfarm payrolls report for September revealing that employment growth strengthened for the third consecutive month. The US economy added 254k jobs in September which was the strongest month of job growth since March. There was also upward revisions to job gains in the previous two months totalling +72k. After the revisions, employment growth has still slowed over the last six months but not as much as initially feared. The six-month moving average for monthly employment growth totalled 167k in September compared to 240k in the previous six month period, and 251k in 2023. Stronger employment growth was evident in the household survey where employment increased strongly by 430k and contributed to the unemployment rate falling from 4.221% to 4.051%.

The report will be reassuring for the Fed and help to ease concerns that they had fallen behind the curve by waiting until September to begin cutting rates. It supports their plans to deliver smaller 25bps rate cuts at upcoming policy meetings. Evidence of a sharper deterioration in labour market conditions will be required for the Fed to return to larger 50bps rate cuts in the year ahead. We still believe that is possible but unlikely now as early as at the next policy meeting in November even if the September nonfarm payrolls report appears too good to be true. It should continue to allow the US dollar to trade on a stronger footing heading into the US election on 5^th November. Furthermore, even if the US CPI report for September released in the week ahead proves to be weaker than expected, it is unlikely to be sufficient now to significantly alter market expectations for smaller 25bps cut in November. Please see our latest FX Weekly report for more details (click here).     

USD/JPY REMAINS VOLATILE IN NEAR-TERM

Source: Bloomberg, Macrobond & MUFG GMR

USD 2: Pricing in faster easing outside of US providing support for USD

The US dollar rebound last week was supported as well by the dovish repricing of central bank policy expectations outside of the US. The euro-zone and UK rate markets have moved to price in a faster pace of rate cuts by the ECB and BoE. The euro-zone rate market is now fully priced for the ECB to deliver 25bps rate cuts at the next four ECB policy meetings. It follows the release last week of much weaker euro-zone inflation data for September and dovish comments from ECB officials including President Lagarde giving the green light for a back-back rate cut this month. A view backed up today by Governing Council member Francois Villeroy de Galhau who stated the ECB will “quite probably” cut rates later this month. He believes that the ECB must now also pay attention to the opposite risk of inflation undershooting their target due to weak growth and keeping restrictive policy in place for too long.

The UK rate market has also moved to more fully price in another 25bps cut at the BoE’s next policy meeting in November, but is on the fence over whether they will speed up the pace of cuts as soon as in December by delivering back-to-back cuts. While BoE Governor Bailey signalled last week that he would be open to more active easing if  inflation continues to make progress, it is not yet clear that a majority of MPC members share the same view. BoE Chief Economist Pill continued to signal more caution in a speech on Friday when he warned the BoE against cutting rates “too far or too fast” as he remained concerned that inflation could prove “more lasting” than expected. The comments from Chief Economist Pill have helped the pound to recover some of the lost ground following the sharp sell-off in response to Governor Bailey’s dovish comments.  

The RBNZ is the next G10 central bank to provide a policy update in the week ahead. The RBNZ is similarly expected to step up the pace of rate cuts by delivering a larger 50bps rate cut at this week’s policy meeting and again at the following policy meeting in November. Like the BoE the RBNZ started their easing cycle in August when they cut rates by 25bps. The RBNZ will have to deliver a dovish policy in the week ahead to meet market expectations for more aggressive easing. The kiwi could attempt to stage a temporary relief rally is there any disappointment over the scale of easing.                       

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
EC	08:45	ECB's Lane Speaks	--	--	--	!!
CH	09:00	FX Reserves (USD)	Sep	3.300T	3.288T	!
EC	09:30	Sentix Investor Confidence	Oct	-14.6	-15.4	!!
EC	10:00	Retail Sales (MoM)	Aug	0.2%	0.1%	!!
EC	11:00	Eurogroup Meetings	--	--	--	!!
US	15:00	CB Employment Trends Index	Sep	--	109.04	!
GE	15:30	German Buba President Nagel Speaks	--	--	--	!!
US	18:00	FOMC Member Bowman Speaks	--	--	--	!!
US	18:50	FOMC Member Kashkari Speaks	--	--	--	!!
US	20:00	Consumer Credit	Aug	11.80B	25.45B	!!
US	23:00	FOMC Member Bostic Speaks	--	--	--	!!

Source: Bloomberg