Comments from San Francisco Fed Chief John Williams on Thursday that the Fed does need to carry on raising US interest rates surely played a role in the futures markets then pricing in a near 90 per cent probability that the US central bank hikes again at its Dec 12-13 meeting. Williams’ comments also arguably fed into a stronger US dollar on Thursday. From that perspective, if a US rate hike is effectively currently priced into the greenback’s value on the foreign exchange market, then it will likely need something else to kickstart a further appreciation in its value or to trigger a reverse of it. In that vein, traders may now see Friday’s US non-farm payrolls (NFP) data as even more important than usual, even though markets are aware that Hurricanes Harvey and Irma will have caused some distortions to the numbers. In fact although the consensus among economists polled by Bloomberg is for a NFP rise of 100,000 in September compared to August’s 156,000 the spread of estimates among those polled varied from a zero rise to an increase of 140,000. That’s quite a spread of opinion and is indicative of the uncertainty surrounding the data release.
But if the uncertainty is a known known, how are market participants computing it? Japan’s MUFG made the point on Thursday that “market participants are well aware of the [hurricanes] distortion and will likely look through weakness in Friday’s non-farm payrolls report.” And that quote gets to the heart of the market’s dilemma today. Because if MUFG is correct, and their argument is perfectly reasonable, then if the market is pre-conditioned to look through weaker-than-expected US NFP data, then it might have already taken a stance. And given the way the US dollar was trading on Thursday and in Asia on Friday, it could be argued that situation was developing ahead of time. Considering this month’s NFP number is even trickier than usual to predict, short-term positioning may actually be greater than normal. Traders may have to have their wits about them once the numbers are released at 1230GMT.
Written by Neal Kimberley, External Currency Analyst.