Jobs data could be overshadowed by trade war concerns

Just before the big FIFA World Cup quarter final matches, there may well be some fireworks in the markets on Friday. As well as the official US employment report, Canada’s jobs data will be published at the same time (13:30 BST or 08:30 EDT), making the USD/CAD a particularly interesting pair to watch. But perhaps more importantly, Friday also marks the day when the world’s two largest economies are expected to slap each other with hefty trade tariffs, with charges on $34 billion worth of Chinese goods scheduled to take effect at 12:01 in Washington.

Ahead of these key events, the US dollar has weakened slightly as some market participants have undoubtedly taken profit on their long positions after the greenback rose for the third consecutive month in June amid increased probabilities of two further rate increases from the Federal Reserve before the end of this year. The stock markets have turned volatile with Chinese shares taking the brunt of the sell-off amid concerns over the impact of US tariffs on demand.

The US government is set to implement a 25% tariff on $34 billion of Chinese imports on Friday. These are on 818 product lines, ranging from cars to smart home devices. China will similarly introduce 25% tariffs on $34 billion of American goods in retaliation. Hopes that the US and China might come to an agreement without these tariffs have been dashed with neither side backing down. The economic damage from tariffs could be costly to both nations, and beyond. There is also a risk that this could escalate into a full-blown trade war. President Donald Trump has threatened further tariffs on up to $200bn of Chinese goods, if Beijing retaliates on Friday, which is almost certain.

Still, regardless of what happens with regards to trade tariffs, the market’s focus will be on non-farm payrolls on Friday afternoon, at least momentarily anyway. The US Department of Labor will report on the number of jobs added to the US economy in June, the unemployment rate, and key wage growth figures. Recently, wage growth has taken on increased importance given market concerns about rising inflation. This has been reflected in a rally for the dollar which closed higher for the third straight month in June.  This week however, the dollar has eased back a little owing to concerns the jobs report may miss the mark on Friday. The greenback’s slight weakness is partially also because of profit taking after a strong recent rally.  

Current NFP Expectations

The consensus expectations for Friday’s headline non-farm payrolls data point to around 195,000 jobs added in June, after May’s forecast-beating 223,000 print. The June unemployment rate is expected to have remained unchanged at 3.8 per cent. In terms of wage growth, average hourly earnings are expected to have increased by 0.3% after last month’s higher-than-expected 0.3% increase.

Jobs Data Preceding NFP

Key employment-related releases preceding Friday’s official jobs data have shown a somewhat disappointing employment picture overall, at least compared to last month anyway.

The ADP employment report came out slightly weaker than expected at 177,000 private jobs added in June against a prior forecast of around 190,000. The slightly disappointing ADP print didn’t lead to an immediate sell-off in the dollar, though the greenback did remain a little lower against the likes of the euro and commodity currencies. It should be kept in mind, however, that the ADP report is typically not a very accurate pre indicator of the official NFP jobs data from the US Labor Department, and sometimes even misses the mark dramatically.

The other pre-NFP leading indicators haven’t been great either. The employment component of the ISM non-manufacturing (services) PMI fell half a point in June compared to the previous month, even if the headline PMI rose. This is not great news since the services is the largest sector of the US economy. Still, at 53.6 points employment in the services sector increased, albeit at a slower pace than 54.1 record in May.

Similarly, the ISM manufacturing employment component missed the mark, falling 0.3 points to 56.0 from 56.3 the previous months.

Meanwhile Jobless claims released in June have averaged 221,250, more or less around the mid-point of the average forecast ranges.

Forecast and Potential USD Reaction

Given the slightly weaker overall pre-NFP leading indicators, our target range for the NFP for this month is tilted to the lower half of the average expectations. With the consensus expectations of around 195,000 jobs added in June, our target falls in the range of 175,000-200,000, given the above considerations. Though the US dollar will likely be moved by a host of other fundamental factors, including continuing speculation on potential trade wars, any headline jobs outcome falling above this range should give the US dollar a boost to potentially resume its recent rally. A result falling within the range will unlikely make much of a significant impact. And any reading that falls significantly below the range could result in a dollar pullback. Of course, the headline result, as previously noted, is not the only important data point. If wage growth figures surpass expectations, the dollar could see a more substantial boost on higher inflation and interest rate expectations.

NFP trade ideas

In the event the jobs and crucially wages beat expectations, then we would favour looking for bullish setups on the dollar against the Chinese Yuan, which has been hit ahead of the US imposition of tariffs on Chinese exports. But as far as the major currencies are concerned, the USD/JPY usually gives a straight forward reaction to the data, anyway.  Meanwhile, in the event that the jobs data disappoints, then we would favour looking for bearish setups on the dollar against the likes of the Aussie or the euro, and possibly gold – the latter having created a large bullish engulfing candle on its daily chart on Tuesday and remaining largely supported since.