Forex

The US Nonfarm Payroll report came in slightly better than analyst forecasts, with the Bureau of Labor Statistics reporting that payrolls fell by 51,000 jobs in July--above median estimates of a 75k drop. Unemployment nonetheless rose more than analysts predicted, with a jobless rate of 5.7 percent - the highest in four years.

Further dampening optimism on the above-forecast headline print, Average Weekly Hours matched its lowest level on record at 33.6, and it seems that demand for labor continues to suffer at the hands of a broad economic slowdown. The seventh consecutive month of job losses underlines the difficulty for the domestic consumer, and such dynamics will make it difficult to see improvements in consumer spending through the medium term.

The dollar rebounded sharply after today’s release of non-farm payrolls report and traders are now pricing some upside surprise in the next FOMC statement which will be held on Tuesday. Yet, the chances of the Federal Reserve leaving rates unchanged at the August meeting remain above 95 percent. However, according to overnight index swaps, which measure interest rate expectations for the next twelve months, traders expect the Federal Reserve to increase rates by 75 bps over the next eight FOMC meetings. This could mean good news for the U.S. dollar, particularly against low yielders like the Japanese yen and Swiss franc.

At the same time, it is typically the change in the end of the projected interest rate curve that guides the dollar’s long-term direction. With that in mind, Fed Funds futures have pared back the probabilities of hikes later down the line with a 69.3 percent probability of no hike by September; and after today’s data, the chances are better than even that the benchmark will remain at 2.00 percent through October. In contrast, overnight swaps have retained the twelve-month outlook for three full hikes. No doubt the outlook for policy will clear up after the Tuesday meeting.