US Dollar May Find Lifeline as Jobs Data Revives Rate Hike Bets

Talking Points:

Conflicting cues make for clouded outlook before January US jobs report
Skewed positioning hints US Dollar to see outsized response on upbeat print
New Zealand Dollar down with bond yields as RBNZ outlook deteriorates

All eyes are on January’s US Employment data. The economy is expected to have added 190k jobs, marking the weakest print in four months. Wage inflation – a major input for Fed policy bets – is also seen slowing. Average hourly earnings growth is forecast to register at 2.2 percent year-on-year, down from a near-six year high of 2.5 percent in the prior month.

Leading data is sending conflicting signals. The ISM survey points to sharp deterioration in manufacturing- and service-sector job creation. The analogous Markit PMI report agrees on a dip in the pace of factory-sector hiring but reckons that payrolls on the services side grew at the fastest pace since September 2015. Initial jobless claims have been trending higher since late October but that certainly did not prevent the emergence of last month’s overwhelmingly supportive payrolls print.

Whilethis makes for a clouded landscape, market positioning does hint at likely trade dynamics. Traders have continued to downgrade Fed rate hike expectations ahead of the jobs report. Fed Funds futures now point to a consensus view favoring no further tightening in 2016.

This seems to make markets asymmetrically sensitive to a better-than-expected outcome that clashes with fading rate hike bets versus the alternative. The US Dollar is likely to trade broadly higher in such a scenario.The sentiment-linked Australian and New Zealand Dollars may bear the brunt of the move as the impact of shifting policy views is amplified by risk aversion amid dimming hopes for greater accommodation.

The Kiwi underperformed in otherwise quiet overnight trade. The currency’s slump tracked a drop in the island nation’s benchmark 10-year bond yields, hinting that deterioration in the RBNZ monetary policy outlook may have been the catalyst at work.

A singular trigger for the dovish shift in investors’ views is not readily apparent however. Corrective repositioning may have amplified selling pressure considering the Kiwi led the other majors in their aggressive offensive against the greenback over the past 48 hours, adding over 3 percent.

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