Trade idea of the day: USD/JPY to 108.00 on NFP?

Tomorrow at 08:30 EST (13:30 GMT-1) the US Labour Department’ non-farm payroll report will be released. The expectation is for 198k new jobs to have been created in March, down from the exceptional 313k in February. Meanwhile unemployment is expected to tick down to 4.0% to hit its lowest level since 2000.

What: 

Tomorrow at 08:30 EST (13:30 GMT-1) the US Labour Department’ non-farm payroll report will be released. The expectation is for 198k new jobs to have been created in March, down from the exceptional 313k in February. Meanwhile unemployment is expected to tick down to 4.0% to hit its lowest level since 2000.

Given the better than expected ADP private payroll data of 241k in March versus expectations of 210k, we could be in line for another upside surprise from the NFP. However, it is worth keeping in mind that weather is still likely to play a role in the March NFP report and traditionally ADP has had difficulty capturing weather effects.

The focus is also expected to be firmly on wage growth. Average earnings are expected to increase by 0.3% month on month, up from 0.1% in February and 2.7% year on year, up from 2.6% in February. 

Strong earnings growth is expected to stoke inflationary pressure, increasing expectations of a more aggressive path of hiking from the Fed.

Some policy makers at the Fed are being held back from supporting an aggressive cycle of rate rises due to inflation remaining under the central bank’s 2% target. 

This was confirmed by St Louis Fed President Bullard earlier this week. However, we only have to look back to January’s NFP where better than forecast average earnings sent treasury yields and the dollar soaring and stocks sharply lower, as investors feared the Fed were behind the curve, showing how sensitive the markets are to inflation concerns.

A June rate hike is 79.1% priced in according to the CME Fed Watch Fund. It would take a disastrous reading for traders to write the June rate hike off. Three rate rises are expected across 2018, should average wages surprise on the upside, this could increase to four.

How: 

USD/JPY is on the front foot heading into the release thanks to the easing of tensions between China and US as fears of a trade war. The pair is up 0.2% at 107.00, its highest level since mid-March. A strong reading tomorrow could see USD/JPY head towards 108.50 in the near term. Meanwhile any weakness could see the pair head towards strong support at 106.00.

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