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As last month, non-farm payrolls (NFPs) come at a time when the US dollar is under heavy pressure. Despite a tightening central bank, worries about weakness in US inflation (of which disappointing wage growth is a part) and a general disappointment in the lack of progress on any front by Donald Trump’s administration has meant that the dollar has lost out to the euro, the yen and sterling. A recent outbreak of (probably premature) hawkishness by the Bank of England (BoE) and European Central Bank (ECB) heads has not helped matters.
This month’s numbers are expected to see job growth of 181,000, lower than the 222,000 of June, and more in tune with the last few months of 2016. Wage growth is expected to be 0.3%, an improvement over the 0.2% in the previous two reports.
The dollar’s declining trend is an illustration of how far a move can go. Each hope of a turnaround has been dashed, but with institutions (according to a Morgan Stanley survey) now the most bearish on the greenback in around eight years, there is the flicker of hope for a turnaround. With so many major market participants short the greenback, having sensibly followed the trend for months now, the risk of a sharp rebound increases.
The implications of a resurgent dollar are clear. Commodities will come under pressure, spelling further losses for oil as it copes anew with rising supply levels, while gold may find its recovery above a long-term downtrend is short-lived. European equities could be big winners as well, since a rising dollar would help to cool the EUR/USD that has carried all before it this year. Having been left behind while the Dow Jones surges to new highs, the likes of the DAX, CAC and Estoxx 50 could finally get a breathing space.
The FTSE 100 could do well too, if sterling weakens, recent data from the Merrill Lynch fund manager survey confirms that UK stocks are very much under-owned relative to eurozone equities. Thus for UK large-cap stocks a dollar rebound could be just the ticket to see the index reclaim its June highs of 7600 and indeed push to new all-time highs.
But for that, we will need a bounce in job creation and wage growth in the US. The stakes are high as we head towards the payroll number on Friday.
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