Friday, January 10, 2020

Dollar looks likely to rise on the release of today’s US labour market report

  • Dollar
  • Euro
  • NonFarm Payrolls
  • DXY


Analysts’ Pick: Dollar looks likely to rise on the release of today’s US labour market report

  • ADP’s employment report signals today’s NonFarm payrolls may beat estimates
  • Geopolitical risk and Brexit likely to continue to help strengthen the dollar
  • DXY’s short-and-medium-term outlook remains strong
  • DXY may decline in the long-term as euro may get boost from German economy

December's private sector payrolls unexpectedly grew 202,000 from November, much higher than the expected 160,000 that economists forecasted. While ADP's report methodology differs from today's NonFarm payroll report from the BLS, surprises in both reports are still somewhat correlated and might be a signal that December's official payroll data may surprise investors as well. The broader change in NonFarm payrolls survey from BLS should beat expectations of a 160,000 growth as a result, possibly by roughly 30,000 to place December's figure at roughly the six-month trailing average of 196,000.

Change in NonFarm payrolls will likely normalise back towards the six-month trailing average


The safe haven attribute of the greenback is also likely to impact prices, as geopolitical risk is likely to rise in the short-term. Although the US and China will sign their phase one trade agreement next week, political tension between the US and Iran is unlikely to fully subside in the short-term. Also, with greater prospects for a no-deal Brexit, capital flow is likely to flow back to the US from the UK or the EU as the market expects the two economies to continue to be impacted by uncertainty.

The Dollar Index gained as much as 12.17% since the trade war escalated in March 2018


The outlook for euro in the medium-to-long-term is likely to get better, putting pressure on the Dollar Index. Germany's factory orders in November fell 1.3% MoM, lower than economists' forecast for a slight 0.3% growth. The data continues to show the European economy being subdued and may not show signs of growth in the near future. But stripping away the effects of equipment, factory orders for other industrial goods grew 1.4%. In addition, with sentiment surveys showing that businesses' outlook has improved, the European economy might rebound in the second half of 2020.

Business sentiment, PMI and GDP all points to possible economic recovery in Germany


The greenback is likely to be driven by better-than-expected NonFarm payrolls in December. We expect the Dollar Index to gain roughly 0.1% to 0.28% on the announcement of the employment report. Expect the Dollar Index to continue to rise towards 98.00’s level in the medium-term as the European economy continues to bottom out in the first half of 2020. But the 2020 outlook for the index is likely to be lower than current levels as the euro may rebound in the latter half of the year.

  Scenario Effect on DXY in the short term
1 NonFarm payrolls beat expectations Upside potential of roughly 0.28%
2 NonFarm payrolls meet expectations Remain little changed
3 NonFarm payrolls miss expectations Downside potential of roughly 0.39%
*Source: ADSS

Technical Analysis:         


The Dollar Index broke past the downtrend resistance of 97.30, as bulls took control of the index on Thursday. But Stochastics indicates that the greenback is likely overbought, and may suffer a correction. DXY will likely be driven by today’s labour market report from the US as traders focus on the changes in NonFarm payrolls for December. Bulls will likely try to retest the resistance level of 97.50 while the bears will try to bring the index back into the downtrend channel level below the support level of 97.26. In the medium-term, DXY is likely to move back towards 50% Fibonacci retracement level of 98.00 before trending back downwards in the second half of 2020.

Support: 97.26 / 97.07 / 96.92

Resistance: 97.50 / 97.60 / 97.77

DXY Chart (H4)