The US dollar is going into the monthly jobs report bid. It has risen against all the major currencies, save the Australian dollar that is up less than a tenth of one percent at pixel time. There are two main considerations. First, many speculators had given up on the strong dollar story. This was evident in the positioning in the futures market, and the numerous articles in the business press arguing the dollar bull market was over.
Second, the divergence story has reemerged. It is not, as some have argued, all about the ECB. Clearly, the second largest decline of sterling in H2 15 took place on Thursday in response to a more dovish than expected BOE.
Moreover, the fact of the matter is that the US two-year yield has risen 22 bp since October 27. It reached a four-year high of 83 bp. Note in an unusual development, there appears to be a small gap in the yield (~81.5bp to 82.1 bp) though it does not appear in the futures chart. Both Yellen and Dudley indicated that a rate hike next month was likely next month unless the economy disappointed.
That does not seem like such a high bar for the October jobs report. The Bloomberg consensus is for a net increase of 185k jobs. The consensus also calls for the unemployment (U-3) rate to dip to 5.0%, and the underemployment (U-6) rate to slip below 10% of the first time since mid-2008. Hourly earnings are expected to have risen by 0.2%, which translates into a 2.3% year-over-year rate. Not spectacular, but at the upper end of its 3-year range.
The 185k consensus forecast compares with the two-month average of 139k. The six-month average is 199k, and the 12-month average is 229. We note that the government sector is adding jobs at a quickening pace. The three-month average is 29k jobs, whereas the six-month average is 20k and the 12-month average is 12k.
The ADP estimate, weekly jobless claims, and the ISM services employment index have failed to confirm the weakness seen in the August and September jobs reports. Still, the takeaway is that job growth may be slowing just not as quickly as the August and September reports seem to suggest. The revisions will prove interesting in their own right.
If there is no significant surprise, the market appears to have already adjusted the increased prospects of the Fed's lift-off in December. Technically, the dollar has approached key areas against the euro (~$1.08) and yen (~JPY122). Unless one is convinced of a near-term break, the risk-reward might not favor extending dollar exposure on a largely as expected report. Can the pendulum swing much further in favor of a hike without a new increase in investors' information set?
Canada reports its jobs data at the same time as the US. The consensus looks for a net gain of 10k jobs, which would match the three- and six-month averages. However, Canada has lost full-time positions in two of the past three months for a total loss of full-time positions of about 25k. The IVEY survey showed an unexpected decline (to 53.1 from 53.7) and the September trade figures showed the first decline in imports in five months, which is a potential sign of weakness in the domestic economy.
The Canadian dollar has been the best-performing major currency against the US dollar since the Bank of Canada met on October 21, losing only 0.15%. The two-year interest rate differential between the US and Canada has widened to 20 bp from just below three bp in the middle of last month. Oil prices just had the largest two-day decline in three weeks amid news of the sixth weekly increase in US inventories. These two factors tend to be associated with a weak Canadian dollar. The US dollar is the middle of a CAD1.30-CAD1.33 range.
A weak Canadian jobs report, which may include a tick down in the participation rate, could see speculation of another rate cut increase. The implied yield on the March 2016 BA futures has risen by 40 bp since late August and 18 bp since the BOC meeting. The risk now lies in the other direction.