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US Employment Report Tipped to Halt US Dollar Advances

The US Dollar’s nascent recovery could hit the buffers on Friday should the prophecies of a leading global investment bank be proven true.

The USD remains bid in quiet trade as investors look to lay low ahead of Friday’s US NFP data where they should get further guidance on the timing of the next Fed rate increase.

US short-term yields remain firm, providing support for the US via attractive yield spreads.

The US Dollar put in a commanding performance on Friday the 26th August as markets had to rapidly adjust to the prospect of a potential US Fed interest rate rise in September.

Veiled warnings from the US Fed’s Yellen and Fischer hinted to such a move and markets are now pricing in a 38% probability of a September rate taking place.

The result was a sharply higher US Dollar basket - the broad measure of the Greenback is seen back to levels noted in mid-August:

US Dollar basket

On the pairs, it would appear that the EUR/USD has born the brunt of the hit having declined from as high as 1.1341 to the present 1.11’s.

We believe the Fed have done their bit in driving USD direction for now and expect a greater emphasis on data for Dollar traders.

US Employment Situation Report Looms Large

With data being key going forward it would come as no surprise were I to tell you that the centre of focus over coming days will be Friday's US labour report.

The US labour market has been ticking along comfortably for the past couple of months, with the increase in non-farm payrolls for June and July both coming in above 250K. The latter had a particularly positive impact on the USD.

However, if we take a step back and look at 2016 as a whole we see only modest growth this year:

US payrolls report

Above: A steady trend in US payroll changes. Graph: CIBC Markets.

“In the US, we’re expecting a touch of disappointment in payrolls after two strong months, with a slower pace to hiring, and a brisker pace to Q3 GDP, needed to bring jobs and output into a more reasonable alignment,” says Avery Shenfeld at CIBC Markets.

As a result, CIBC believe that over the remainder of the year, activity and employment numbers are likely to converge somewhere in between.

CIBC are looking for headline payrolls to register a gain of 155K when August’s data are released, this compares to the 180K presently being forecast by economists.

Both forecast will ensure the three-month average payroll increase come in at more than 230K, leaving consumers in a position to continue supporting growth for the remainder of this year.

The gain will see the unemployment rate fall to 4.8%, with the participation rate edging slightly lower from July’s pickup.

Average hourly earnings should increase 0.2%, but that will still see the annual rate tick back to 2.5%, “another sign that the Fed can increase rates very gradually,” says CIBC Markets’ Royce Mendes.

Despite the deceleration in payrolls, the labour market continues to look healthy and should support consumer spending for the remainder of the year.

“While that will likely lead the Fed to raise rates in December, the slow pace of wage gains aren’t giving the central bank any reason to rush an increase,” says Mendes.

CIBC believe their below-consensus call on headline payrolls should be negative for the dollar and positive for fixed income.

BNP Paribas Forecasting a Strong Reading, and a Stronger Dollar

BNP Paribas' economists meanwhile expect Friday’s employment report to show robust payroll growth with a reading of 215k expected, which will put 3m average job growth at a powerful pace of 254k.

"Indeed, given strength in the last two reports, even a 125k result on Friday would leave the 3m average running at 224k. So far this week, July personal income and spending met expectations for trend-like increases, while the core PCE deflator y/y rate held up firmer than expected at 1.6%, better than the 1.5% consensus and not far off the Fed’s 2.0% target," say BNP in a preview note on the event.

BNP's position metrics suggest USD positioning was short heading into Chair Yellen’s speech last week, particularly vs. the JPY and AUD, implying more scope for the USD to gain ground vs. those currencies as US rates adjust higher.

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