We mostly see downside risks for the dollar today as the US releases jobs numbers for August. The first reason is that, according to our short-term valuation models, the dollar is already expensive against the G10 at current USD swap rate levels. Second, while a big payroll miss today should prompt a repricing to three Federal Reserve rate cuts by year-end (60bp priced in for now), a big upside surprise may be treated with much more caution, as markets might start to doubt the credibility of data under the new leadership at the Bureau of Labor Statistics.
Beyond the headline payroll figure (consensus 75k), it will be the two-month revisions that attract greater attention alongside increased focus on the unemployment rate (consensus 4.3%), where any higher-than-consensus prints should have a magnified negative impact on the dollar. The reasoning is that while payrolls have slowed, that might be due to labour shortages rather than layoffs, which would instead be captured by a rise in unemployment. Fed Chair Jerome Powell himself tried to keep the focus on the jobless rate rather than payrolls before Jackson Hole.
Yesterday’s ADP payrolls, which have proved to be a more reliable indicator of official payrolls after July’s revisions, showed hiring was halved to 54k in August, below consensus. Earlier, Challenger reported the weakest hiring for August on record (since 2009) and the highest layoffs figure on record, excluding the 2020 pandemic. It all seems to point to a further deterioration in the jobs market, and the dollar’s resilience relative to rates in the past week means – in our view- there is a good chance of retesting the 1 September 97.55 lows in DXY.
Francesco Pesole