Thursday, December 3, 2020

Expect incoming labour market data to confirm a slowdown in hiring; DXY retests a 2018 support

  • Dollar
  • NonFarm Payrolls
  • UK Unemployment Rate
  • DXY


Analysts’ Pick: Expect incoming labour market data to confirm a slowdown in hiring; DXY retests a 2018 support

  • Today’s jobless claims dataset to feature a statement on inaccuracies this week which may reduce its impact on the market
  • The overall trend for claims should remain the same, although a potential uptick in initial claims is likely because of increased layoffs due to renewed restrictions in populous US states
  • We forecast NonFarm payrolls to add only 450,000 jobs in November as the US economy continues to show signs of a slowing recovery. Both ADP’s private employment dataset and the Fed’s Beige Book have a similar analysis of the economy as well
  • The dollar is unlikely to strongly react to the release of the payrolls data, but it may be enough to spark some concern for profit-taking. This should help support the DXY that is trading at oversold levels, but it is unlikely to be enough to stop the overall downtrend

Both the updated beige book from the Fed and private employment report from ADP confirms a slowdown in employment, implying that it is likely that we will see a similar trend in the coming NonFarm payrolls data on Friday. Today's jobless claims dataset should show a similar trend as last week, but investors of the data should note that the US Government Accountability Office (GAO) has recently issued a report recommending that the US Department of Labor (DOL) clarify that its figures for its weekly unemployment benefit claims dataset is an inaccurate reflection of the number of unique individuals claiming benefits. We should see that statement being included in today’s dataset and result in some of the indicator’s impact on the market. This is due to the backlogs of processing the historic level of claims leading to the use of proxies, as well as states dealing with potentially fraudulent claims. While this does impact the use of models featuring the claims dataset, the overall trend should still be an appropriate overview of the labour market in the US, i.e. unemployment is settling at elevated levels. We do also expect the reimposed restrictions in the more populous states of New York and California to put pressure on businesses, resulting in added layoffs that will potentially be reflected in initial claims.

Initial jobless claims may be distorted, but its overall trend is still an indication of a weak labour market


Wednesday's private employment highlighted the continued slowdown in employment in the US. While a growth in employment in the private sector continued, it was the third consecutive week of a slowdown and the second lowest increase in employment since July, with all the report's selected industries not yet at full employment. Out of the 15 selected industries of the report, only six have recovered 50% or more of its employment from pre-pandemic/lockdown levels (specified as February 2020), continuing to display the imbalance in recovery across industries. Also to note is that the impact from renewed restrictions in several states is unlikely to have been reflected in November's report due to the cut-off date of the report being in the middle of the month.

ADP’s report signals that the labour market for the private sector is still imbalanced and a distance away from pre pandemic levels


In addition to that, the updated Beige Book report from the Fed highlighted indirect impacts of the pandemic on the labour market. Like ADP's report, the Beige Book remarked that almost all surveyed districts said the pace of an expansion in employment was slow and the recovery remained incomplete. A notable mention was remarks from Philadelphia and three of the four Midwestern Districts that stated activity began to slow in early November due to the surge in Covid-19 cases. The consequent impact of this was the renewed fears of infection which caused plants and schools to close that subsequently spread to other states. This indirectly impacted employment since difficulties in employers meeting flexible working schedules for added childcare and increased wages for virtual schooling arose. This report coincided with the employment portion of ISM's manufacturing PMI report for November earlier in the week as well.

The pace of new Covid-19 cases in the US continues to accelerate in populous states


November's nonfarm payrolls report from the US Bureau of Labor Statistics is likely to show a similar trend tomorrow, in which we expect an approximate 450,000 growth in jobs for November. Our forecast is close to that of the median of the surveyed economists by Bloomberg (478,000), leaving room for little surprise. Markets are likely to mostly have priced this in and instead opt to look at more optimistic news concerning vaccines and possibly fiscal stimulus in the US. We expect the release to have only a slight upside impact on the dollar as a result, and instead continue to consolidate in an overall downward trend as traders speculate for more government spending in the US. That said, with a drawdown in November's payrolls, it should set the tone for the December report, which in our view is expected to be largely weighed down by the renewed restrictions across multiple states. We expect the Dollar Index to see a slight uptick as a result, trading back above 91.00 closer towards 91.88 for a brief period before resuming its downtrend towards 90.40's level.

Technical Analysis:


DXY has entered oversold levels yet momentum does not seem to be slowing down in the immediate future. The catalyst for the trade is likely due to talks of more fiscal spending, renewing optimism that Congress may pass a stimulus legislature soon. But profit taking is likely to occur soon, assuming it has not already happened. There is likely still room for the index to trend lower before that with RSI still yet to reach the lows seen earlier in the year and MACD not signalling a steeper drop off. With fundamentals still likely skewing the dollar lower, there should still be room for the index to go lower towards an upper limit of a key range in 2018 at 90.40, even after a slight upward consolidation on profit-taking and possible concern regarding the US economy’s health.

Support: 90.40 / 89.16 / 88.47

Resistance:  91.88 / 92.58 / 93.36

DXY Chart (H4)