Upside risks to payrolls and the USD
G10 currencies are generally range bound going into the August US nonfarm payrolls report. Our economists expect to see a 170k increase in payrolls, slightly below the average pace of the last three, six and twelve months. Meanwhile we see the unemployment rate rising to 7.5%, reversing some of the July drop. The risks to the release are clearly to the upside given yesterday’s upside surprise in the employment component of the services ISM index, which tends to be one of the more reliable predictors of payrolls. Today’s number is of key significance for the markets as it will be seen through the prism of Fed QE tapering plans – a reading around current trend of just under 200k or stronger would support and reinforce the majority expectation for the Fed to start tapering QE in September. US yields remain the key driver of the dollar with the 10y trading just below the important psychological 3% level and the 2y not far from multi-year highs at just over 50bp. The drive higher in yields critical for our bullish USD view, while given the fact that EUR and GBP rates are also moving higher, we prefer to express that view against JPY and CHF where front-end rates are more successfully anchored by central bank policy. Our key position going into payrolls is long USDCHF where we target 0.9750.
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BNP Paribas