Will NFP have lasting impact on USD ahead of next week’s US inflation data?

USD: Heightened geopolitical risks support USD ahead of NFP report

The US dollar has stabilized at lower levels ahead of the release today of the latest nonfarm payrolls report for March. After falling to an intra-day low yesterday of 103.92, the dollar index has since climbed back up to 104.30 although is still well below the weekly high of 105.10 from Tuesday. The US dollar has been supported by more risk-off trading conditions overnight following yesterday’s sell-off for US equity markets. The S&P500 index declined by -1.2% yesterday which was the biggest daily percentage decline since 13^th February, and is currently on course for the biggest weekly decline since the recent equity market rally started back in November. The sell-off in the US equity market yesterday coincided with a further move higher in the price of oil with Brent jumping back above USD90/barrel for the first time since October. It follows reports yesterday that Israel scrambled navigational signals over the Tel Aviv metropolitan area as the country prepared for a potential Iranian attack on the economic centre. The measures were reportedly taken by Israeli officials to disrupt GPS-navigated drones or missiles that Iran or its proxies might fire at the country. Fears over the risk of a broadening out of the conflict in the Middle East have been heightened this week after Iran vowed to take revenge on Israel who it blamed for a deadly airstrike on its embassy in Syria. 

The release later today of the latest nonfarm payrolls for March will also be important for US dollar direction heading into next week. Market participants will be watching closely to see if employment growth continues to remain strong at the start of this year, but more importantly if the US labour market continues to rebalance in line with the Fed’s view that inflation pressures will continue to ease. Employment growth in the establishment survey has averaged 252k/month in the first two months of this year which compares to an average over the last six months of 231k/month. There has been a marked divergence as employment in the household survey has been much weaker, and the unemployment rate has been drifting higher as it hit a fresh high of 3.9% in February and moved further above the cyclical low of 3.4%. The impact from recent nonfarm payroll report releases on the US dollar has been mixed. In the first hour after the nonfarm payroll report was released in March the dollar index declined by -0.13%, which followed a +0.77% gain in January and a -0.20% decline in December. Unless there is a big surprise today, it is more likely that next week’s releases of the latest US CPI and PPI reports for March will be more important for Fed rate cut expectations and US dollar direction through the rest of this month.    

DIVERGENCE BETWEEN ESTABLISHMENT & HOUSEHOLD SURVEYS

Source: Bloomberg, Macrobond & MUFG GMR

JPY: Hawkish comments from Governor Ueda provide support for JPY

The yen has benefitted from more risk-off trading conditions overnight resulting in USD/JPY falling to an intra-day low of 150.81. The heightened risk of intervention from Japan has helped to keep USD/JPY below the 152.00-level this week even as US yields have risen to fresh year to date highs. Finance Minister Suzuki reiterated again overnight that it is important that FX moves stably and that excessive FX moves are undesirable. He continues to watch FX moves with a high sense of urgency and won’t rule out any options against excessive moves. Verbal intervention is proving effective for now at slowing the pace of further yen weakness.

The yen has been helped as well by hawkish comments from BoJ Governor Ueda overnight. In an interview with the Asahi Shimbun he noted the positive results of the Shunto spring wage negotiations will be reflected in wages through the summer and then reflected in higher consumer prices from the summer through to the autumn helping to gradually push up inflation. He displayed more confidence in achieving the 2% inflation target in a stable and sustainable manner which he described as “in sight” and that the likelihood will increase “rapidly”. He signalled that if the degree of confidence or certainty rises ahead in achieving the inflation target, that would be a reason to move rates further. On the yen specifically, he repeated the message from the March policy meeting that “if exchange rate moves are likely to have a non-negligible impact on the wage and price cycle, that would be a reason to respond as monetary policy”. Overall, the more hawkish tone of the comments support our view that the BoJ will hike rates again sooner than expected in July (click here).  

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
EC	10:00	Retail Sales (MoM)	Feb	-0.3%	0.1%	!
US	13:30	Nonfarm Payrolls	Mar	212K	275K	!!!
CA	13:30	Employment Change	Mar	25.9K	40.7K	!!

Source: Bloomberg