us-nfp

Get Ready For NFP Friday This Week 

This week is jam packed with important economic events. Including NFP Friday. 

Last week was dominated by risk off tones. Monitoring the equity space will be very important for the week ahead. 

In this article, we’ll go through important events that happened last week. We will also discuss events to look out for in the week ahead along with some trade ideas.   

Below are the countries we will discuss in this week’s article: 

United States Dollar
Canadian Dollar
Great British Pound
Australian Dollar
New Zealand Dollar
Euro
Japanese Yen
Swiss Franc

 United States Dollar

What Happened Last Week 

Due to a lack of tier one data the Dollar were uneventful for the majority of last week. Bigger picture fundamentals kept the USD strong during last week. 

The biggest data point and mover of the USD was the release of Q3 Advance GDP on Friday. GDP QQ came in better than expected at 3.5% versus forecasts of 3.3%. 

Personal Consumption remained the biggest reason for the strong growth in the US. Consumption reached the best level since 2014 and contributed 2.7% of the total GDP number. 

Wells Fargo states that the 3.5% shows that current GDP is still above the long-run potential rate. They noted that the 4.2% Q2 number was probably a cycle peak. 

They expect GDP to slow in coming quarters. 

ING explained that tighter financial conditions might act as a headwind to growth. They also added that a tight job market and increasing wages should underpin spending. 

The Week Ahead  

On Monday 29 October data for the US will kick off with Core PCE. 

Core PCE is an important measure as it is the FED’s preferred gauge of inflation. But as CPI numbers precede the PCE market reactions are normally muted. 

Analysts does not expect fireworks from Personal Income and Spending reports. This is due to Friday’s Q3 GDP report already implying a 0.3% rise in consumption. 

On Thursday 1 November we will see the latest ISM Manufacturing PMI release. After the big beat on ISM Non-Manufacturing in Sep this report should get more attention. 

 

Danske Bank states that the ISM Manufacturing has been too high compared to reality. They expect it to soften further. 

The main event for the US this week will be NFP on Friday 2 November. This latest labour report will be even more important after the softer release in Sep. 

The bad print of 134k in September have been attributed to Hurricane Florence. Markets are expecting the US economy to have added 190k jobs in October. 

Job openings reached 7 million in August. The continued tight labour market should keep wage growth underpinned. 

Markets are expecting average earnings MM to climb to 0.2%. This should raise the YY number to 3.2%. 

ING notes that a print of 3.2% would mark the fastest rate of wage growth since 2009. 

The Unemployment rate is forecasted to stay flat at 3.7%. 

 

A flat print at 3.7% would keep US unemployment at forty-year lows. 

Trade Ideas 

We expect the best trading opportunity for USD to be Friday’s labour report. 

There are a couple of things you need to be aware of when trading an NFP release: 

  1. The first reaction of the market normally comes from the headline Non-Farm Payrolls

Look out for any big deviations between expectations and the actual numbers. A positive print is normally Dollar positive. Similarly, a negative number is normally Dollar negative. 

The initial reaction to the release can be fast and volatile. Do not jump in without considering all of the data within the report. 

  1. Average Earnings YY can be more important than the headline print.

After the headline number look to wage inflation for a more sustained reaction. Any big increases in inflationary signs can boost US Treasury yields. 

A boost in US Treasury yields would be supportive of the USD and negative for equities. The opposite is also true. 

  1. Don’t forget the Unemployment Rate

Also look to the Unemployment rate. Lower Unemployment can raise inflation expectations and vice versa. 

Thus, any unexpected rise or drop in the Unemployment rate can affect the USD. 

  1. Put it all together

The volatility of the NFP release can be tricky to gauge. Traders need to look at the report as a whole to find the best possible trade direction. 

Look at the report as a whole, not just the headline number

 Canadian Dollar 

What Happened Last Week 

The recent BOC rate decision and press conference was the main event for the CAD last week. 

As expected the BOC raised interest rates by another 25 basis points. Overall the BOC had a pretty hawkish tone. This was in contrast to what some analysts expected. 

The Reason for dovish expectations was due to a big miss on headline inflation for September. The BOC remained positive as they expected the 3% spike in headline CPI to be transitory. 

In our article last week we highlighted that the BOC’s preferred Core CPI measures are still on the 2% target. 

Another hawkish development was an upward revision to business investment and export forecasts. 

The BOC also dropped use of the word “gradual” with regards to monetary policy. This was taken as very hawkish and CAD appreciated into the press conference. 

The impact of this faded when Poloz stated it did not necessarily mean they will hike quicker. After the rate announcement, the market’s focus was turned to the risk off sentiment. 

This caused a further drop in Oil prices which pressured the CAD into the end of the week. CAD is a very Oil dependent economy. 

Over 19% of Canada’s exports come from Mineral Products. Crude Oil alone consists of over 15%. Oil prices normally affect the CAD. 

The Week Ahead 

Gov Poloz will testify to the House of Commons standing committee On Tuesday 30 October. He will also testify to the Senate Standing committee on Wednesday 31 October. 

These meetings often include important comments from the BOC about monetary policy. The answers provided by the Governor can offer valuable insight. 

The most important events of the week will be GDP MM for August and the September Jobs Report. 

Markets are expecting GDP MM for August to soften to 0.0% from 0.2% prior. ING notes that a softer number should still put GDP YoY at approximately 2.4%. 

They explain that 2.4% is still an upbeat growth number for the Canadian economy in year over year terms. 

Consensus points to a 10K employment change for September. The Unemployment rate is expected to stay flat at 5.9%. 

Overall the Canadian jobs market looks to remain tight. 

Trade Ideas 

Last week’s rate statement and press conference were taken as hawkish by the market. Look out for Gov Poloz’s tone about the BOC’s rate path during his testimony. 

Look out for any big deviations on the GDP MM release to take advantage of. 

In terms of the jobs report do not get blindsided by the headline number alone. The initial reaction normally comes from the headline number, but it can fade very quickly. 

Full time jobs are much more important than part time jobs. Analyze the headline employment change with the full and part time changes as well. 

Any big drop or climb in the full-time employment change is likely to have a bigger impact on the overall report. 

If equities continue their recent correction it can put further pressure on Oil. Keep a close eye on Oil prices before entering any CAD positions to minimize your risk.  

 Great British Pound 

What Happened Last Week 

Moves in the Pound are very tricky with Brexit at the moment. Sentiment seems to change on a daily basis. 

The Pound had a big sell off in early European trade on Monday. This was due to reports that some Tory Brexiters were campaigning for a vote of no confidence in Theresa May. 

Later on Monday the DUP backed Eurosceptics to brand the EU’s backstop as illegal. After this the Pound was sold off across the board. 

On Tuesday the Pound saw a bit of relief. This was due to reports that the EU was willing to offer a UK-wide customs union to solve the Irish border issue. 

The rally was short lived as markets pared the move during the NY trading session. 

On Wednesday the Pound was pressured again. This followed reports that PM May were to appear before the 1922 committee. 

Due to a lack of tier one data, Brexit remained the biggest mover for the Pound. 

The Week Ahead  

There are a few major events for the Pound in the week ahead. On Monday 29 October UK’s Philip Hammond will deliver the Autumn budget. 

The main driver for the Pound remains Brexit. This makes Hammond’s job a lot trickier. 

Danske bank noted the DUP threatened to vote down the new budget if their demands were not met. The DUP does not want the UK to accept a border between Northern Ireland and Great Britain. 

Thursday 1 November will be a very busy day in terms of risk events. Manufacturing PMI, the BOE Inflation Report and the BOE rate decision are all on Thursday. 

As Brexit remains the focus we doubt that Manufacturing PMI will be of that much importance. Markets are expecting the PMI to slow to 53.0 from 53.8. 

If there is a substantial deviation in the PMI only trade it in line with current Brexit sentiment. 

The BOE rate decision and press conference will be in focus. ING explains that the recent data all supports a central bank that should be hawkish. 

Wage growth reached its highest level in almost a decade in October. 

 

Headline CPI is at 2.4% and Core CPI just below the BOE’s 2% target. 

 

Brexit remains the main consideration. Until there is a clear outcome the BOE should remain on hold. 

Markets are pricing in a hold at this week’s meeting with all 9 MPC members voting to keep rates steady. 

On Friday 2 November we will also receive the latest Construction PMI data. PMI should take a back seat due to Brexit at the moment. 

Trade Ideas 

Look for specific mentions to Brexit within the budget on Monday. Any positive or negative comments regarding Brexit can provide short term trade opportunities. 

Any big deviations in the PMI’s should be traded in line with Brexit sentiment at that time. In the event of substantial deviations look for shorter term trades only. 

We expect the focus for Thursday to be on Carney’s press conference after the rate decision. Look for any outlook changes in terms of Brexit. 

In terms of the rate decision, we don’t expect any fireworks. 

Watch out for the MPC votes. If some MPC members vote for a hike that can offer a short-term trade opportunity. 

Moves in the Pound have been tricky with Brexit comments changing sentiment daily. Manage your risk carefully on any GBP trades. 

 Australian Dollar 

What Happened Last Week 

The Australian Dollar started the week pressured. A potential hung parliament was the reason. 

The AUD was pressured for during the week due to the correction in global equities. 

The Aussie Dollar is considered a proxy for risk. Thus, the AUD normally depreciates and appreciates based on risk sentiment.  

With a lack of tier one data releases the AUD was especially vulnerable to risk adverse tones in the market. 

The Week Ahead 

It will be a busy week for the Australian Dollar in terms of data releases. 

On Tuesday 30 October we have the September Building Approvals. After the drop of -9.4% in August this release should gain some attention. 

 

From the chart above we can see that it is a very volatile report and it can bounce back. According to Westpac, this downtrend is set to continue and fall throughout 2019. 

On Wednesday 31 October we have the main data event for the AUD with Q3 CPI numbers. Market expectations are for CPI QQ to stay flat at 0.4% and for CPI YY to drop to 1.9% from 2.1%. 

ING estimates that AUD CPI numbers for Q3 might be better than the consensus of 0.4%. Given current global conditions the AUD should lose further ground this year. 

They see any beat on AUD CPI to be short lived. This is due to the RBA being content with the recent weakness in the AUD. 

The CPI YY number might be of more importance this week. A 1.9% print would mean that CPI falls below the bottom end of the RBA target band. 

On Friday 2 November is also the release of September Retail Sales data. Retail Sales MM is expected to stay flat at 0.3%. 

Trade Ideas 

With the current equity concerns look out for risk sentiment with regards to the AUD. Further falls in stock markets should weigh on the Aussie. 

Look out for Building Approvals as well. Another miss would confirm Westpac’s view of a continued downtrend. 

CPI will be the event of the week. Given the current positioning in the AUD a beat might move more than a miss on the Aussie. 

Keep an eye open for risk sentiment this week when taking trades on the AUD. A positive risk tone would be AUD positive and a negative tone should pressure the AUD.  

 New Zealand Dollar 

What Happened Last Week 

Like its antipodean cousin, the NZD was largely moved by risk sentiment last week. Especially with a lack of tier one data. 

Moves in NZDJPY can act as a barometer for the risk tone in the market. We can expect NZDJPY to strengthen in risk on trading and weaken in risk off sentiment. 

This is not always the case of course but it can provide good short-term trading opportunities. 

The Week Ahead 

The only significant data for the NZD this week is the NBNZ Business Outlook. The Outlook is scheduled for Wednesday 31 October. 

The RBNZ has attributed their dovish stance on weaker growth and business confidence. The Business Outlook for this week should have the market’s attention. 

The previous -50.30% (Aug) and -38.3% (Sep) were historically low. Almost as low as during the global financial crisis. 

In our article last week we noted that there is record short positioning on the NZD. It’s interesting to note this has not changed after the better than expected Q3 CPI. 

NZD net short positioning remains at historically low levels. 

Trade Ideas 

Look out for the Business Outlook on Wednesday. Given the extreme short positioning a beat might move markets more than a miss. 

As a commodity currency the NZD is affected by risk sentiment. Keep risk sentiment in mind when taking NZD trades this week. 

Keep a close eye on the risk tone in the market as sudden changes can affect the NZD. 

 Euro

What Happened Last Week 

The EUR started the week on a slightly better foot as Italian bond yield retreated in early trade. This was due to a better than expected Italian credit rating. 

The prior week the EU sent Italy a letter calling the Italian budget a serious breach of EU rules. On Monday Italy responded to the letter by refusing to back down on their budget targets. 

On Tuesday the positive sentiment of the credit rating waned. This caused Italian bond yields to stay elevated to the detriment of the EUR. 

Further pressure was added on the Euro on Wednesday. This was due to big misses on Euro Zone PMI’s. 

Manufacturing PMI came in soft at 52.1 versus expectations of 53.0 which was the lowest reading since 2016. Services PMI also slowed to 53.3 from 54.5. 

IHS notes that “Manufacturing orders fell for the first time since November 2014”. This report does not make growth prospects for Q4 look very promising for the Euro Zone. 

Both IHS and ING stated that the recent drop in the PMI’s are consistent with 0.3% GDP growth in Q4. This is much lower than the previously anticipated 0.5%. 

On Thursday the ECB had their latest rate decision and press conference. The ECB kept interest rates unchanged as expected. 

Pres Draghi remained positive about EU growth despite the recent soft data. Talking about growth he said the EU is “experiencing a weaker momentum but not a downturn”. 

Inflation, or a lack thereof, has been a thorn in the flesh for the ECB throughout 2018. Draghi kept their view that inflation will increase as expected. 

They attributed their confidence on increasing negotiated wages and high capacity utilization. This is important as we move into next week’s data releases. 

The Week Ahead  

Scotiabank states it will be important to watch the market open on Monday. Italy’s debt rating by S&P only arrived after markets closed on Friday. 

S&P did not downgrade Italy’s BBB rating but they did change the outlook from stable to negative 

It will be important to watch the market’s reaction to this when trade reopens on Monday. 

The first tier one data event for the Euro is Q3 Flash GDP. The event is scheduled for release on Tuesday 30 October.  

Markets are expecting GDP QQ to remain flat at 0.4% and GDP YY to slow to 1.9% from 2.1%. 

From the above chart one can easily see the slowdown in growth momentum from the start of 2018. After the disappointing PMI’s last week the GDP will be in focus. 

On Wednesday 31 October the market will see the release of October CPI numbers. As mentioned above, persistent weak core inflation is a sticking point for the ECB. 

 

The above chart shows Core CPI has been stuck in a range for the past 5 years. Expectations are for CPI YY to climb to 2.2% from 2.1% and Core CPI YY to edge up to 1.0% from 0.9%. 

Trade Ideas 

One of the major concerns for the EUR has been rising Italian bond yields. Keep a close eye on that with regards to S&P’s outlook change. 

If the market’s take S&P’s rating as positive there is a chance that Italian Bond yields may retreat. Should this happen we can expect temporary strength for the EUR. 

If the rating is taken as negative, we would expect Italian Bond yields to climb. This would add to the existing Italian concerns and would pressure the EUR. 

We expect any trade opportunities resulting from S&P’s ratings to be short term. This is because the market’s focus next week will remain on tier one data and Italian politics. 

There are also the two tier one data releases. The Italian budget concerns still weighs on the EUR. 

We expect any significant misses on GDP and CPI to offer more sustainable moves. Only trade in line with the current Italian sentiment in the market. 

 Japanese Yen 

What Happened Last Week 

The JPY had a slow start to the week due to improved risk sentiment on Monday. 

This came as China’s Xi Vowed to help the private sector with ‘Unwavering’ Support. 

But risk sentiment reversed sharply again on Tuesday. This was due to a continuation of the recent correction in global equities. 

Global equities have been on shaky ground for the past three weeks.  

CNN reported that the Nasdaq plunged 3.8% last week. They added that the Dow and S&P 500 wiped out 2018 gains. 

As a safe haven, the equity troubles supported JPY throughout the rest of the week. 

The Week Ahead 

The main event for Japan this week will be the BOJ rate decision on Wednesday 31 October. 

Analysts are expecting the BOJ’s ultra-accommodative monetary policy to continue until 2020.  

Danske Bank expects the BOJ to keep its QQE policy with yield curve control in place and unchanged. They added that there is no need for the BOJ to change their rhetoric at the moment. 

There have been some positive developments in the Japanese economy. After a slow start in 2018, the Q2 growth was boosted by a pickup in business investment. 

The labor market also showed signs of a pickup which has gradually increased wages. An increase in wages can be positive for consumer spending which will be good for inflation. 

But Japan still has negative interest rates and CPI is still very far away from target. 

CPI has been climbing from 2015. Currently it’s a full 1.0% away from the BOJ’s target. 

ING explains that the lack of inflation progress might convince the BOJ to adopt a lower target. They see a possibility for “more stealth tightening steps to come”. 

Trade Ideas 

The JPY is considered to be a safe haven currency. As a safe haven currency, the JPY depreciates and appreciates based on risk sentiment. 

Keep eyes peeled on the recent equity sell-off. If this continues we would expect that to be supportive of the JPY. If equities recover we could see JPY weakness. 

We don’t expect much to happen from the BOJ rate decision this week. If we see an unexpected hawkish BOJ or stealth tapering that would be JPY supportive. 

Keep the current risk sentiment in mind when taking trades on the back of the BOJ. A strong risk off sentiment might keep a lid on a more hawkish statement or press conference. 

 Swiss Franc 

What Happened Last Week 

With a lack of tier one data the moves in the CHF was kind of choppy last week. We expect the biggest reason for this was due to risk flows. 

In our article last week, we noted that the CHF has not appreciated on the back of Italian budget or Brexit issues. Not as much as one would expect from the save haven currency. 

The Week Ahead 

The main event for the CHF this week will be Oct CPI on Thursday 1 November. 

The SNB revised down their inflation forecast for 2019 and 2020 at their Sep meeting. This signaled a more dovish stance for the SNB. 

According to ING, the SNB is going to maintain an ultra-loose monetary policy for some time. 

The other big focus for the CHF would be Brexit and the Italian Budget issues. Neither of these two political challenges are expecting to go away anytime soon. 

Normally this should keep a lid on EURCHF. But the Franc has not responded to these issues as one would expect. 

Trade Ideas 

We are not expecting fireworks from the CPI release this week. 

As a safe haven, the CHF should depreciate and appreciates due to risk sentiment. This is not always the case. 

As the CHF is not moving as we would expect we are inclined to minimize risk by not trading it right now. We don’t see any clear trading opportunities for the CHF right now. 

Wrap Up 

There are a couple of data releases to look out for this week. 

This includes EUR GDP and CPI, AUD CPI, BOJ and BOE meeting, and NFP Friday. 

In terms of politics, expect Brexit and Italian politics to take center stage. 

Also make sure to keep an eye on US Equities. There is a slew of earnings reports this week. 

Earnings can have a tremendous impact on the equity space. So, watch risk sentiment closely this week. 

Make sure to have your news squawk on and ready to jump when the opportunity presents itself.  

Please feel free to leave your comments or questions below.

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