Talking Points:

All Eyes on US May’s US Employment Report into the Week-End
US Dollar to Rise if Payrolls Increase Tops Consensus Forecasts
High-Yield FX May Suffer Most if US Data Bolsters Fed Outlook

Currency markets are likely to look past a round of second-tier economic releases in European trading hours to focus on the much-anticipated US Employment data set. The report is expected to show nonfarm payrolls rose by 215,000 in May, marking a bit of a slowdown from April’s 288,000 increase. The unemployment rate is expected to tick higher to 6.4 percent after dropping to a four-year low of 6.3 percent in the prior months.

The US Dollar turned sharply yesterday in anticipation of the release, dropping 0.44 percent on average against its leading counterparts to produce the largest single-day decline in two months. Softer labor-market data threatens to cast doubt on continued normalization of Federal Reserve monetary policy, warning that the central bank may opt to slow the process of “tapering” QE asset purchases or delay subsequent interest rate hikes.

US economic news-flow has increasingly improved relative to expectations since early April however.That hints analysts are underestimating the vigor of recovery from the downturn in the first quarter, opening the door for upside surprises. Such a result is likely to bode well for the greenback, sending the benchmark unit higher against most of the majors. Higher-yielding FX may be particularly hurt in this scenario stimulus reduction bets weigh on broader risk appetite. We remain short AUDUSD.

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