Today’s Non-farm Payrolls are expected by the consensus to show a gain of 240,000 jobs in December. This would be an eleventh consecutive month of the US economy adding more than 200,000 jobs which is the best sequence of job creation since 1995. However, unless there is a significant negative surprise, it is likely that the jobs creation is not going to be the really important part of the data.
The Federal Reserve will know that the US is creating jobs at a decent pace, but it now needs to see wage growth to suggest that slack in the economy is being reduced. Subsequently, I believe equally as important as the headline number is the average hourly earnings growth. After a strong +0.4% month on month growth in November, the average hourly earnings growth for December is forecast to come in at +0.2% and anything less would clearly be a disappointment. So where are markets sitting ahead of the Non-farm Payrolls data?
Perhaps interestingly, the chart below shows the strong correlation of the US Dollar Currency volatility index (orange) has with the US Dollar Index (purple) since the big dollar rally began in July. It was only during a rather erratic period of trading in October when the correlation has been below 0.5, subsequently, the correlation between the two has been strong for much of the past 6 months. The volatility index has dropped away in recent days and if this continues then it could begin to question how sustainable the run higher on the Dollar Index.
There have been some interesting moves in the forex markets over the last couple of days. The embattled majors such as the euro and sterling have started to embark upon a (mini) rally against the US dollar. This technical rebound has resulted in a small base intraday pattern forming on Cable which implies a move back to $1.5210. There is key near term resistance around $1.5200 which could hold back a recovery, but the outlook for sterling moving into Payrolls data is positive. For the euro, the recovery is now so pronounced and the bulls are still struggling to gain a foothold. There is strong near term resistance around $1.1850 which also needs to be overcome. I continue to view 119 as a near term pivot level on Dollar/Yen as the consolidation range of the past few weeks. Holding above 119 suggests there is a slightly positive bias for a move on 120.82, whilst losing 119 would put pressure back on 118 once again.
If payrolls come in broadly in line with estimates and earnings growth is also a solid +0.2% then the market may actually take this as baked into the price for the dollar. It could be an excuse to take some profits on this strong recent run higher on the dollar. This could result in a continuation of a flight away from the dollar and could help to fuel the rebounds in Cable and EUR/USD.
As ever I think that the market will react with the usual volatility from Non-farm Payrolls whatever the data. Once again it is likely to be an interesting afternoon.