The US dollar remained near its two-month low on Thursday as investors awaited the release of pivotal US jobs data. Many markets across the world will be closed on Friday, when the closely-watched non-farm payrolls report is set to be released. This comes after the Institute for Supply Management (ISM) reported disappointing manufacturing and services sector data, along with private employment figures on Wednesday.
Economists polled by Reuters expect non-farm payrolls to grow by 239,000 in March, following February’s gain of 311,000. For the past year or two, the non-farm payrolls number has delivered more upside surprises than misses, which could lead to a highly volatile market session. If the number falls short of expectations, investors may opt to buy the US dollar as a safe haven.
Potential Market Reaction
The sluggish economic data has caused traders to scale back on their bets on how much longer US rates would stay in restrictive territory. However, it has also raised concerns about the risk of recession. If the non-farm payrolls report comes in as expected or higher, it could ease concerns about the possibility of a recession. But, if it comes in lower than expected, there could be a market reaction.
Michael Brown, a markets strategist at TraderX, said that payrolls numbers had beaten expectations for 11 months in a row, which is the longest stretch of positive surprises in several decades. He added that if the streak ends on Good Friday when liquidity is poor, it could lead to absolute pandemonium in the market.
Possible Trading Scenarios
A non-farm payrolls miss might beef up the US dollar’s appeal as a safe haven. The Japanese yen, which is also supported by safe-haven bids, was last down slightly on the day at 131.37 per dollar. Meanwhile, the risk-sensitive Australian and New Zealand dollars slid 0.43% and 0.66%, respectively.
The key to foreign exchange trading will be the interplay between the US economic numbers and sentiment about Federal Reserve policy, said Ray Attrill, head of FX strategy at National Australia Bank.
In other currencies, sterling was up 0.07% on the day at $1.247, while the euro was little changed at $1.091.
Federal Reserve Policy
The disappointing economic signs have strengthened the view that the Fed will reverse course on rate increases, with traders hoping for more insight when Federal Reserve Bank of St. Louis President James Bullard speaks later on Thursday. Cleveland Fed President Loretta Mester, a known hawk, said in an interview with Bloomberg TV on Wednesday that it was too early to know if the Fed would need to raise its benchmark rate at its next policy meeting in early May.
US rate futures markets are currently pricing in a roughly even chance of the Fed leaving rates unchanged at its next meeting, with rate cuts being priced in as early as July and through to the end of the year.
Conclusion
Investors are waiting for the release of US jobs data, which could potentially impact Federal Reserve policy and cause a volatile market reaction. If the non-farm payrolls report comes in lower than expected, it may lead investors to buy the US dollar as a safe haven. The sluggish economic data has caused traders to scale back their bets on how much longer US rates would stay in restrictive territory, but it has simultaneously reignited concerns about the risk of recession. The Federal Reserve may reverse course on rate increases in light of disappointing economic signs.
