Lee Hardman, Currency Analyst at MUFG, suggests that the US dollar has remained on a weaker footing in the Asian trading session ahead of the release today of the latest non-farm payrolls report.
Key Quotes
“The US dollar has weakened sharply since the release of the weaker than expected ISM non-manufacturing survey which has heightened investor concerns over the ongoing loss of growth momentum in the US. The market is fearful that negative external risks are beginning to feed through more materially to a weakening of domestic demand which has remained resilient so far.
The performance of the US service sector has been one of the bright spots of the US economy supported by the solid improvement in the US labour market. The latest ISM surveys signalled as well that employment growth is likely to weaken both in the service and manufacturing sectors. The non-manufacturing and manufacturing employment sub-components declined to 52.1 and 45.9 respectively in January. One caveat is that the non-manufacturing employment component also declined sharply in January of last year but it did not prove an accurate signal for employment growth which remained solid.
Non-farm employment growth slowed modestly last year although it remained robust as the US economy added on average 221k jobs per month compared to 260k in 2014. Fed officials have signalled that employment growth of around 100k jobs per month is likely only required to tighten labour market conditions.
Employment growth last year was boosted by the surge in employment in Q4 which averaged 284k jobs per month. In part it provided an offset/payback for softness in Q3 when employment growth averaged 174k jobs/month. It was also boosted by the favourable warmer winter weather. As a result it is likely that employment growth will be weaker in Q1 as payback for the surge in employment in Q4 further increasing downside risks for employment growth in today’s non-farm payrolls report. We would view non-farm employment growth of between 150k to 200k in January as a reasonable outcome providing reassurance that the underlying trend for employment growth remains solid.
Our own regression model which admittedly underestimated employment growth in Q4 is projecting employment growth of 185k. It would likely provide some modest support for the US dollar as our short-term models are signalling that weakness appears to have overshot somewhat in recent days. Readings materially below 150k or above 200k would trigger a larger US dollar response with risks skewed to the downside.
Revisions to the employment data will add to the uncertainty as well. The focus on the earnings figures may garner less attention given recent developments. However, they are expected to reveal monthly earnings growth rebounded in January after a survey quirk exaggerated softness in December. The release yesterday of the latest unit labour cost report for Q4 provided further evidence that the underlying trend is accelerating providing support for tighter Fed policy.”
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