RBS – How to trade NFP – Scenarios and Trades

FX View

Stronger-than-expected employment should keep the Fed on pace to hike the Fed Funds rate in September, and pulling forward of expectations could support the USD. A stronger USD and pulled-forward rate hike expectations could pressure commodity prices and weigh on commodity exporter currencies. The quick re-acceleration of the EUR positioning squeeze in recent days suggests EUR short positions remain entrenched, and the EUR, could be an outperformer if weak payrolls puts the US economic and monetary policy divergence narrative under pressure. With officials suggesting they are keeping an eye on FX developments in Japan, JPY may strengthen on weak payrolls as well.

Scenarios and Trades
300k and above – A swift repricing of FOMC tightening expectations would likely put broad upward pressure on the USD. USD/JPY could rise, putting pressure on emerging Asia FX as competitiveness is hit. Long USD/JPY, Long USD/KRW

250k to 300k – A solid payroll report that could support the USD. A stronger USD paired with heightened expectations for tighter FOMC policy may put downward pressure on commodity prices. Canada releases its own May payrolls data tomorrow, proving a risk that the CAD moves are exacerbated by its own domestic report. Long USD/CAD

200k to 250k – While one could argue that a low 200k print would be a disappointment, we see persistent gains above 200k as sufficient to keep downward pressure on the unemployment rate and satisfies the Fed’s criteria of “continued improvement in the labour market.” (Our economists discuss this point at length in their preview, linked on p 1) This result may be neither strong nor weak enough to alter the current narrative, but a result in this range likely keeps the FOMC on track to hike the policy rate in September. Wage inflation readings may drive the USD. No Trade

150k to 200k – A disappointment, especially when taken in context of other indicators that have shown improvement. Short USD/JPY
150k or below – The European reflation narrative has quickly returned to focus amid a single upside surprise in Euro-area core inflation, pressuring the “EUR/USD lower on monetary policy and growth divergence” narrative from the EUR front, even as the US data have looked stronger. Surprisingly weak payrolls could put this theme under even further pressure, and sharp moves in European FI in recent days suggest short EUR positioning remains entrenched. Long EUR/USD

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