Excellent figures on NFP as a reason to buy the dollar

2 nov. 2018

Alright, so today will be published statistics on the US labor market. In this review we will remind its content, talk about how to respond to a particular indicator, as well as tell our expectations.

The block of statistical data on the US labor market includes a number of other significant indicators besides an NFP (non-farm payrolls) - the number of new jobs created outside agriculture. For previous data and forecasts, see table below.

The block of statistical data

Pre Forecast
15:30 USA 3 Number of new jobs created outside of agriculture 134K 190K
15:30 USA 3 Average hourly wage (m/m) 0.3% 0.3%
15:30 USA 3 Unemployment rate 3.7% 3.7%

How to respond to a particular indicator and why?

Growth in employment generation created outside the agricultural sector above forecasts - is a relevant reason for buying the dollar because it is a strong signal that the economy is in good shape.

The average hourly wage growth is also a reason for buying the dollar. But the logic here is slightly different. The fact is that wage growth is a signal to the Fed that inflationary pressure in the economy is growing, which means that the Central Bank must respond to this, for instance, by raising interest rates. The interest rate hike is the cause for the growth of the dollar, which is becoming more attractive against other currencies.

The decline in unemployment is a positive signal for the dollar since it indicates an improvement of the economic performance of the country. But it is worth warning about the existence of the so-called natural level of unemployment, to fall below which is undesirable. So, unemployment in the United States is already somewhat below this mark, so a further decline is no longer desirable.

In total, the increase of the NFP with the average wage growth - a clear signal in favor of buying the dollar. If the data is mixed (for example, the NFP is better than expected, and the wage growth is worse than in forecasts), the reaction may be unpredictable.

Let’s remind that we await the NFP to be much higher than outlooks - somewhere around 250K. Motivation - a great shape of the US economy and the labor market, Trump's tax reform, the end of the hurricane season and consequently the sharp increase in labor demand linked with the end of the pause due to hurricanes, as well as simply excellent data from ADP, published on Wednesday. Accordingly, with such expectations, the most probable scenario is the dollar growth in the foreign exchange market. Taking into account that yesterday the dollar was heavily sold out, there is a good opportunity to buy it cheaper, which we recommend using.