Dollar bulls on the defensive
Softer-than-expected US labor data and a retreat in bond yields dragged the US dollar to a one month low on Wednesday. The DXY index has fallen 1.3% from August highs as traders remain guessing when the Federal Reserve will pull the “taper” trigger.
ADP’s employment report released yesterday raised warning flags ahead of Friday’s biggest risk event when the non-farms payrolls report is due to release. Private payrolls increase by just 374,000 in August, 38% below estimates of 600,000. The US manufacturing activity, despite unexpectedly picking up in August, the sub-index which measures factory employment fell to its lowest level in nine months.
Forecasting the NFP figure is a hard task, and the ADP report had not been a good early indicator recently. Economists’ forecast range for tomorrow’s NFP ranges from 375k to 1,027k, suggesting that traders need to be ready for a surprise. Given the latest pullback in the US dollar, markets are likely positioned for a slight negative surprise tomorrow, so if the number comes above the median estimate of 750k the dollar will likely recover most of its losses, while a figure near or below 400k would drag the US currency further.
A soft number tomorrow may be bad news to the dollar, but it isn’t necessarily bad news to risk assets. In fact, it may be positive to risk as it would delay the tapering decision by the Federal Reserve from September to November or even December. Expect equities in the US to remain near the flat line until Friday’s jobs data provide some direction.
Oil steady as OPEC+ sticks to production plans
OPEC+ wrapped up one of its fastest virtual meetings yesterday with members agreeing to the continuation of the plan of adding 400,000 barrels of oil per day each month to the market. The alliance does not seem worried yet about the uncertainties created by the contagious Delta variant on demand, neither caved to the White House demands of increasing production.
With oil demand still expected to reach pre-pandemic levels in 2022, current OPEC+ strategy will likely keep Brent price balanced around $65 - $75. A break above 2021 highs of $77.84 needs demand to exceed current supply from OPEC+ and other producers, but we are not there yet.