USD: Short-term yields drifting higher with NFP in focus - MUFG

Derek Halpenny, European Head of GMR at MUFG, suggests that of course GBP/USD has been under downward pressure in part due to the broad appreciation of the US dollar as short-term yields in the US continue to drift higher with the probability of a rate hike this year increasing.

Key Quotes

“Nominal yield spreads have not been exerting the usual degree of influence on many of the key currency pairs but the 2-year swap spread has now reached 130bps in favour of the US over the euro-zone, a new cyclical high and a level not seen since September 2006. With this spread breaking new levels, there is an increased risk of this re-exerting influence on EUR/USD spot direction.

The fundamental backdrop is also interesting given today is payrolls today. Our NFP model is estimating a gain of 203k. This is in part due to the huge jump in the employment component in the ISM non-manufacturing report and certainly suggests upside risks today relative to the consensus estimate of a 172k gain.

Crucial also will be the data on average earnings. The annual growth rate in hourly earnings is expected to jump with only a small 0.1% m/m gain recorded in September of last year. Given the momentum is positive for the dollar and given the upside move in yields, the dollar could have another good day today. That said, the fed funds Dec futures contract equates to about a 75% probability of a rate hike in December and the markets will be cautious on pushing that probability much higher, which might limit the fallout from a decent report.

It would take a really exceptional report to bring markets around to the idea that the Fed could go in November. We are pretty sure the FOMC will try and avoid that but given Trump’s accusation of bias in favour of Clinton, a very strong report today would make the November meeting interesting.”