US Dollar: Strong payrolls fail to sustain Dollar gains – MUFG

MUFG’s Lloyd Chan notes the Dollar strengthened after a stronger-than-expected August US jobs report, with Nonfarm Payrolls and labour participation surprising to the upside while wage growth eased. Markets now price a significant chance of further Federal Reserve tightening by December, but DXY remains little changed since Fed Chair Warsh’s Jackson Hole speech, suggesting investors are not yet convinced of a sustained Dollar rally.

Jobs data bolster Fed tightening risks

"The US dollar ended last week on a firmer footing after a much stronger-than-expected August nonfarm payrolls report. Nonfarm payrolls rose by 162k in August, well above consensus expectations of 55k, while July employment was revised higher to a gain of 21k from an initially reported decline. The unemployment rate held steady at 4.1% and labour force participation improved to 61.6%, pointing to a labour market that remains resilient."

"Meanwhile, average hourly earnings slowed slightly to 3.1%yoy from 3.2%yoy, suggesting wage pressures continue to ease gradually."

"Importantly, markets continue to price more than 60% probability of a 25bps Fed hike at the September FOMC meeting and approximately 35bps of cumulative tightening by December, equivalent to around 1.4 hikes by year-end."

"DXY gained 0.3% on Friday, though essentially unchanged since Fed Chair Warsh's Jackson Hole speech. This divergence suggests dollar bulls may not be convinced yet that higher yields can generate a sustained dollar rally."

"Renewed calls by President Trump for lower interest rates, together with his threat to stop trading with countries that the US has a trade deficit with, may also contribute to some negative policy premium on the dollar."