From the Floor: Dollar in focus ahead of December NFP —...

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From the Floor: Dollar in focus ahead of December NFP — #SaxoStrats

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January 05, 2018 global market call, home.saxo, saxostrats, tradingfloor.com, usd

• USD trade shrugs off strong ADP jobs data

• Interest rate spreads a useful metric for dollar outlook

• Average Hourly Earnings in focus as NFP looms

• The headline NFP figure is forecast at +190,000

• Japanese equities extend gains, auto shares outperform

• Cannabis stocks plunge by 24% on Attorney General ruling

By Michael McKenna and Clare MacCarthy

The US dollar is struggling to find its footing even as the latest macro data give it an apparent all-clear. "The market shrugged off Thursday's strong ADP jobs beat," says Saxo Bank head of forex strategy John J Hardy, adding that traders may be forecasting a broad lack of changes to the Federal Reserve's 2018 outlook as the rest of the world gains ground in terms of monetary policy normalisation.

Presently, US 10-year rates are rangebound and the yen is plunging lower, with both EURJPY and GBPJPY near cycle highs. In terms of the dollar outlook, Hardy says that investors should take a look at recent developments in interest rate spreads for a sense of where the market sees the Fed.

"The market seems to be saying that Fed expectations don’t really matter that much, because the rest of the world will be playing catchup. Arguably, the stuck-in-a-rut US 10-year rate underpins that narrative, but if we look at relative rate moves at the shorter end of the curve, we’ve reached some head-turning levels...

"We presently see US and Australian two-year rates near parity for the first time since 2001, when AUDUSD traded near 0.50, versus 0.78 now... this is very notable stuff", says Saxo's FX chief.

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Source: Saxo Bank

The key factor for the dollar today is of course the December nonfarm payrolls release at 1330 GMT, with Hardy reporting that average hourly earnings are the key metric to watch.

"The nonfarm payroll headline figure doesn't really matter at all. What's really important is the average hourly earnings," says Hardy, explaining that since this week's very strong ADP payroll figures failed to rouse the dollar from its slumber that it would take a significant beat on the NFP headline today to shift the needle much.

Peter Garnry, Saxo's head of equity strategy, said he "wouldn't be surprised at all" to see a beat in the headline figure, on the basis of the really strong ADP payroll growth of +250,000. "The way the ADP is modelled, they try to be as close as possible to the NFP."

In stocks, the risk-on move continues apace with Garnry pointing to a further 1.3% gain for the Nikkei overnight. One sectoral shortfall to keep an eye on is in the cannabis industry, where shares declined 24% yesterday on US Attorney general Jeff Sessions rescinding an Obama-era policy limiting federal involvement in state-level cannabis policy; nevertheless, Garnry notes, the industry remains up 200% since October.

Garnry also points to strong outperformance in the automotive industry with Saxo's Equity Radar favouring Peugeot, Renault, Ferrari, Geely, and Magna as names to watch.

Today's data calendar sees Eurozone inflation estimates and PPI out this morning with a US ISM non-manufacturing release following the nonfarm payrolls print at 1500 GMT. According to Garnry, markets expect this reading to stay on its upward trend and lift to 57.6 for December from November's 57.4 reading.

In Europe, Garnry notes that traders will closely watch the Eurozone inflation figures for December as "inflation remains the biggest puzzle in markets today".

Automotive gains

The automotive industry was the strongest-performing sector

last month on Saxo's Equity Radar. Photo: Shutterstock

Michael McKenna and Clare MacCarthy are senior editors at Saxo Bank