US Payrolls: A volume suppressor – RBS
Research Team at RBS, suggests that the payrolls report has the potential to drive market pricing of a September Fed Funds hike to near zero or 100%.
Key Quotes
“There’s also potential for markets to become more curious about a second rate increase in December. Following recent guidance by Fed speakers, the impact on currencies appears more binary than normal; whether to buy or sell USDs vs JPY, EUR.
RBS US Desk Strategy Economics do not believe Friday’s data will compel the Fed to act as early as September. Following hefty increases in each of the prior two months, they look for job growth to have settled back a bit in August, with overall payrolls expected to have advanced by 175k in July. The details (average hourly earnings and average workweek) are also expected to be soft. As normal, the jerk reaction will be on the headline jobs growth print. However, the lasting impact may depend on details, most obviously average earnings.
Our base case is that the report only sees an incremental higher pricing for higher rates in September and December but not enough to price either with very high conviction. Under such a scenario, we see USD consolidating. However, with the ECB and BoJ in focus, EUR/USD is seen drifting lower and USD/JPY higher. Risk of a squeeze in USD longs increases the closer payrolls prints to 150k.
Below 150 and Fed tightening could be off the table for September entirely. Under this scenario, we see potential value in establishing intra-day USD/JPY shorts.
Below we set out possible currency reactions to a range of payrolls outcomes.
260 and above | USD out-performance as markets become curious about a pair of 25bp hikes
Futures markets price September as a near certainty and prices in a far higher probability of a further 25bp in December. USD out-performs in the G4 space. The prospect of strong US (and global) growth is seen ultimately providing an offset for EM FX but not immediately. The immediate EM consideration is the return of the focus on EM deleveraging and FX debt given more abrupt Fed hike pricing. Short EUR/USD, long USD/JPY, long USD/MYR (1m NDF)
210-260 | Continuation of recent stronger USD theme
A solid report that has a material impact on the pricing of a single quarter point rate hike in 2016, particularly towards the higher end of the band. Perhaps September but more likely December. Long USD/JPY, long USD/KRW
165-210 | Consensus, focus turns to ECB and BoJ meetings
The consensus and RBS US Desk Strategy Economics expectation fall within this band. Only a modest incremental change (higher) in rates expectations, with perhaps December rising to be more likely than not. Reaction on the day may depend on details and ultimately on Fed speaker comments in coming days. USD consolidates. EUR/USD drifts lower. Neutral, to mildly positive for EM FX.
145-165 | Vol suppressor
A volatility suppressing outcome. Re-establishment of carry positions. Mild EUR/USD retracement (higher) and short USD/INR
50-145 | Profit-taking in USD longs
Still in line with labour force growth, but little reason for the FOMC to act quickly with CPI and wage pressure subdued. Gives Yellen an opportunity to return to her preferred habitat of low rates for potentially much longer. Also a number that could be seen as consistent with a late economic cycle move, suggesting a very low terminal rate. Fed tightening off the table for September entirely. Profit-taking on recent established JPY shorts. There may be more concerns about global growth. Short USD/JPY, Long JPY/KRW.”