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Dollar looking toppy ahead of non-farm payrolls?

After a significant bounce for the dollar, a hefty beat on NFPs this month is needed to maintain momentum.

Capitol Hill
Source: Bloomberg

The monthly non-farm payrolls (NFPs) report is expected to see 191,000 jobs created for April, a rebound from the weather-induced weakness of March, when 103,000 jobs were all that the US could muster. This figure of course will see revisions, so with the focus partly back on whether there is fresh slack in the American economy, an upward revision would suggest that there is indeed still plenty of room for growth in job numbers. The unemployment rate is expected to fall to 4% from 4.1%, while the all-important average hourly earnings figure is forecast to rise by 0.2% after a 0.3% gain in April.

Non-farm payrolls

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The six-month average for job creation has hovered around 200,000 since mid-2014, indicating a very healthy pace of job growth. February’s blockbuster 326,000 was evened out by March’s dismal number, but the general trend is still strong. The weekly jobless claims figures continue to fall, with initial claims now at levels not seen since 1969. Wage growth should begin to feed through to the broader economy, bolstering the Federal Reserve’s (Fed’s) tightening policy, but with a focus on slow and gradual.

Given the rapid appreciation in the US dollar since the April lows, we are going to need to see a fairly healthy beat on all fronts for the greenback to keep rallying. The Fed meeting might help chivvy the dollar along, but the currency looks overstretched on a number of timeframes, so watch out for near-term reversals. While the US dollar index has done well to clamber back above its 200-day simple moving average (SMA) of $91.68, those of a bullish persuasion would be looking for a pullback in order to engender a more favourable risk-reward dynamic.

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