As we close in on Friday’s non-farm payrolls report, investors are growing nervous. Stocks ended the day in negative territory after rallying more than 100 points. The U.S. dollar extended its slide against the Japanese Yen for the fourth day in a row, but safe-haven demand drove the greenback higher against other major currencies. Sterling was hit the hardest, which is no surprise considering that the Bank of England is expected to release lower economic projections on Thursday. Next to the Yen, the Australian dollar was the most resilient thanks to a larger increase in retail sales.
According to ADP (NASDAQ:ADP), U.S. companies cut more than 20 million jobs in the month of April. Non-farm payrolls are expected to fall by 21 million, but the outcome could be much worse because this report does not include government payrolls. ADP also under reported increases and declines NFPs in each of the last six months. We have been looking for USD/JPY to slip to 106 ahead of the report, but with everyone anticipating massive job losses, it will be interesting to see exactly how much currencies will respond the day of the release. The Federal Reserve and the White House have warned that the unemployment rate could hit 10% but the fact that the Dow Jones Industrial Average is hovering near two-month highs tells us that their warnings have either fallen on deaf ears or investors are looking past this month’s weakness to the recovery ahead. Jobless claims are scheduled for release tomorrow – claims in excess of 3.8 million will send USD/JPY tumbling lower.
While our eyes will always be on the greenback, the main focus on Thursday should be the Bank of England’s monetary policy announcement and Quarterly Inflation Report. After lowering interest rates twice in reaction to COVID-19 and launching a bond-buying program, the central bank is widely expected to leave interest rates and QE unchanged. This means the focus will be on its Quarterly Inflation Report. The central bank is widely expected to warn that the economic damage has been significant but instead of publishing forecasts, it is expected to lay out various scenarios for growth and inflation depending on the length of the lockdown. This is a strategy used by the ECB, which said the EZ economy could shrink between 5% and 12% this year. There won’t be a press conference either. Instead, it will host an embargoed call with journalists. There’s very little doubt that it will need to increase the size of its QE program later this year, and how sterling trades will depend on how upfront Governor Andrew Bailey is about plans for more easing. Meanwhile, the UK government prepares to drop it stay-at-home message on Monday, which is controversial considering that the number of deaths in the UK just exceeded Italy.
The commodity currencies will also be on the move, with Australia’s service sector PMI report scheduled for release along with Canada’s IVEY PMI numbers and China’s trade balance. Chinese data shouldn’t be that market-moving because it has limited its data deterioration. Australian and Canadian numbers, on the other hand, could be quite ugly. The Canadian dollar has fallen harder than the Australian dollar with the price of oil resuming its slide. The Australian dollar was supported by increases in monthly and quarterly retail sales but service-sector activity is expected to contract further. The New Zealand dollar sold off harder than the Australian dollar even though labor market numbers weren’t terrible. New Zealand reported job gains in the first quarter (against expectations for decline) along with a smaller than expected increase in the unemployment rate.