Currency markets and Federal Reserve await crucial US labour report

Enrique Díaz-Álvarez03/Nov/2015Currency Updates

Focus among US Dollar traders this week has undoubtedly turned to this Friday’s crucial labour report, the outcome of which could be critical to the short term evolution of the USD.

Data-dependent December Fed hike

At the Federal Reserve’s October monetary policy meeting last week the FOMC remained consistent with our view of a data-dependent December interest rate hike. The Fed explicitly mentioned “In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress–both realised and expected–toward its objectives of maximum employment and 2 percent inflation.”

These comments, in our view, give a clear indication that US policymakers will only consider hiking the benchmark interest rate at its next meeting in December if there are no negative surprises in the next two labour reports. The first of which is set for release this Friday, and then the second in the first week of December.

September’s Nonfarm Payrolls

Last month’s labour report was a significant disappointment. Nonfarm payrolls, which measure the number of jobs added among all US non-agricultural businesses, showed a sizable downshift in job creation to just 143,000 in September. There were also negative revisions in both the July and August numbers (Figure 1).

Figure 1: US Nonfarm Payrolls with 12 month moving average (2010 – 2015)
labour report

Source: Thomson Reuters Datastream Date: 03/11/2015

This was well below the 200,000+ job creation level that we have recently been accustomed to, and was one of the main contributing factors as to why the Federal Reserve did not hike interest rates at its October meeting. Unemployment also remained unchanged, while wages failed to grow at all for only the second time this year. This underwhelming report caused a rather sizable USD depreciation, in excess of one percent against its major currency peers.

Expect volatility

As always with the US labour report, widely seen as the most important monthly economic indicator, significant and unpredictable currency movements are to be expected when the report is released at 1.30pm GMT on Friday.

We believe that any negative surprises below the 180k job creation level could cause a sizable US Dollar sell-off and may delay calls for a Federal Reserve interest rate hike. By contrast, if the nonfarm payrolls figure on Friday is in excess of this level, the central bank will be firmly on track for an interest rate hike in December and will likely provide strong support for the Greenback.

We continue to expect the Federal Reserve to hike interest rates this year at its next meeting on 16th December, dependent on no negative surprises in the next two nonfarm payroll figures. This should provide good, long term support for the US Dollar against almost every major currency.


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Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.