NFP - waiting for the devastating data and sell the dollar

10 Oca 2020

Today will be published a block of statistics on the US labor market. Traditionally, statistics on the US labor market arouse increased interest among traders and often lead to volatility emissions in financial markets, since these data are some kind of leading indicators of the state of the economy as a whole, and are also used by the Fed as a guideline when the Central Bank takes decisions on monetary policy parameters.

After three days of a steady growth of the dollar in the foreign exchange market, traders and investors should just scratch their hands in order to fix profits on long positions. It’s just an occasion. And it seems to us that they will get a reason.

But first things first.

The main focus will be on two indicators: NFP figures, as well as the average hourly wage.

For the first time, everything is clear with the NFP: forecast or better than forecast readings are an excuse for buying a dollar. But this is at first glance. The fact is that the data on ADP, published on Wednesday, greatly exceeded the market expectations: they will now have little 160K or even 180K. A figure less than 200K will be perceived as a failure since dollar growth on Wednesday and Thursday is largely an attempt by markets to discount under excellent Friday data based on figures from ADP.

That is, the data from ADP to play against the dollar, when it is very likely to fall even against the background of better than predicted data. Well, if the data comes out worse than forecasts, then imagine the price of the dollar before Wednesday evening and you can estimate the minimum extent of its decline.

As for the average hourly wage, many economic experts see wage growth as one of the main threats to the US economy and name it among the key factors that could cause a recession in the US economy. Salary growth leads to higher costs for corporations. This in turn negatively affects their profits. The deterioration in profit growth, and especially its decline, may lead to a massive exodus of investors from the US stock market, which in turn will trigger a chain reaction of the economic crisis.

Note that investors start 2020 in an extremely nervous state. The likelihood of a recession is quite high, and no one denies the fact of a slowdown in the world economy. Any confirmation of these fears will provoke a sharp round of concern, that is, the reaction to the data will be double: not only the data will be processed, but also the expectations that are the consequence of these data.

What are our expectations? We have long been supporters of the impending crisis, so in this regard, our position is quite predictable. But today we have one more argument from the field of statistics. In the past 2 months, NFPs have come out on average 50% better than expected. So over the previous 3 years, the NFPs have never come out better than forecasts more than twice in a row. That is, purely statistically one should expect the release of data worse than forecasts. Again, according to statistics, the data can come out much worse than forecasts.

The last time, after two consecutive positive deviations from the forecast for the third time, the NFPs came out 59%. Worse than experts expected. The penultimate time, when a similar situation happened, after two positive deviations, the NFPs was 89%. Worse than expected. That is, we are not at all surprised if the data comes out, say, 50% worse than expected. And this is a figure below 100K. 100K is a psychological barrier, below which panic begins.

That is why today we will sell the dollar. Ideal candidates for this are the pair with the Japanese yen and the British pound, as well as gold.