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US Non-Farm Payrolls: Outlook for the US Markets and the US Dollar

Friday, June 5, 2020 will usher in the release of yet another edition of the Non-Farm Payrolls report to the markets. The market expectation is for the US economy to have lost 8000K jobs (down from -20500K registered a month earlier), with an increase in the unemployment rate from 14.7% registered previously to 19.5%.

So far, the US markets and the US Dollar have ignored negative employment data in the last two months, as markets appear to have priced in all the negatives in advance. Emphasis has all been on the stimulus packages rolled out by the Fed and other central banks, which acted very quickly to contain the impact of the coronavirus contagion on the various economies. However, this month’s NFP report is coming at a time when the USD is taking a beating in the financial markets. The US markets are also seeing a bit of a stall and are finding it hard to stage the resistance breaks required to retake the 2020 highs.

Now that the markets have staged a significant recovery, the drop in the US Dollar at a time of domestic and international tensions could be a signal that investors have started to look away from the stimulus packages and are now focussing on other market fundamentals. This could be the month where the markets and the US Dollar begin to react to the numbers as they are.

Despite a projection that the 8 million jobs lost in May 2020 are an improvement from the 20.5 million job losses of April 2020, the numbers still do not look good considering the various cash injection windows already created by the Fed.

Outlook for the USD and US Markets

This week, it has been about the domestic riots and the US-China trade tensions on the one hand, as well as fundamentals that have lifted other currencies on the USD pairs on the other. Risk-on sentiment and actions of the Reserve Bank of Australia (RBA) have raised the AUDUSD by 4% this week. Rising crude oil prices have lifted the Canadian Dollar and sent the USDCAD pair tumbling by 3.6% in seven days. The German-led coalition to secure additional stimulus has lifted the Euro, and positive vibes from Brexit talks have led to a 2% surge of the British Pound against the US Dollar. These new fundamentals may continue to impact the USD pairs heading into Friday’s NFP report.

The projections for both the employment change and the unemployment rate show that conflict is in the offing. For the NFP numbers to be tradable on several USD pairs, we need to see the following scenarios:

– An improvement in employment change has to be accompanied by a lower or static unemployment rate for the report to the USD-positive as well as positive for the Dow Jones Industrial Average.

– Conversely, falling employment change should follow a rising unemployment rate to produce a USD-negative situation. This would also bring on bearish sentiment on the US markets.

If the numbers come out as projected, the NFP report becomes non-compliant to trading, which leaves the USD pairs open to the prevailing fundamentals already mentioned. An exception will be the USDCAD pair, which may be impacted by the outcome of the Canadian version of this report to be released at the same time. The projections for the Canadian employment data tilt the odds of better performance in favour of the USDCAD.

Today’s ADP Employment Change will provide some insight as to what to expect from the US NFP report on Friday.

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