US: Strong NFP expected
The market is looking for a solid May job report, especially after ADP’s upside surprise. According to data collected by the ADP Research Institute, US companies added 253k jobs in May, well above estimates of 180k, while the previous month’s reading was upwardly revised to 174k.
Expectations for Nonfarm payrolls, which are due for release at GMT 12:30 today, are therefore quite high, suggesting that the risk is mostly on the downside for the greenback. Markets are expecting a reading of 182k in May, compared to 211k in April. In this current set-up, a weaker print will drive the USD lower, especially against the euro, while an upside surprise should have limited effects as it is already priced in.
We believe the market is impatiently waiting for the recent and sustained employment gains to finally translate into wage growth. Indeed, a solid pick-up in average hourly earnings (expected at 2.6%y/y) should drive the USD higher as it would allow for a more aggressive path of tightening from the Federal Reserve. EUR/USD has been treading water slightly above 1.12 in the European morning.
CAD looks Vulnerable on weak crude
President Trump’s decision to walk away from the Paris Climate Accord is likely to result in additional oil production. This is not supportive of oil since recent reports indicate that OPEC nations – that are exempt for production cuts – have started to increase production. According to a Bloomberg report, total OPEC production increased by 315k barrel/daily to 32.21mln.
In addition, softness in 1Q US suggests that the demand backdrop is not as supportive as originally anticipated. With oil at already low prices, it is difficult to visualise further weakness. However, sustained $48 brl oil ($45-$55 range) will drag certain economies down. Canada and Mexico run external deficits at this oil prices range so an extend period of weakness will only worsen balances. Further erosion in economic positions is likely to hurt their currencies. In addition, with CAD negative carry with USD will pressure traders to quickly liquidate positioning given the choice.
On the other hand, Russia and Norway as oil exporters can generate current account surpluses and support mid-term currency strength. From a trading perspective we suspect the RUB is overbought and comments from the central bank indicated their discomfort with the strong currency would keep away. Yet, short CAD (long USDCAD) looks very attractive on fundamental basis. USDCAD held key support at 1.3385 on the bearish shift for oil and break above 1.3570 would suggest further bullish momentum.
