Could ADP Report Foretell a Gloomy Payrolls Report?
This morning's release of a weaker than expected ADP report (forecast for private employment payrolls) showing the net creation of 57K jobs in February, suggests that Friday's release of February non-farm payrolls may come in well below consensus estimates of 100K. The ADP report has been generally effective in predicting whether non-farm payrolls would come in above or below consensus forecasts, rather than predicting the actual figure.
Nonetheless, the ADP's January report was well out of line with the January non-farm payrolls, when the ADP came in at 152K from December's 118K, while the January payrolls fell to 111K from 206K. It is worth noting that ADP has made significant revisions to its methodology in predicting private payrolls, in which case make today's prediction of a dismal 57K likely call up a payrolls figure of 50-60K. In this case, expect USDJPY to come under renewed pressure, targeting the 115 figure. This would also increase chances of a May Fed rate cut, in line with our calls for such action since November of last year. This would not only resurrect concerns of an emerging slowdown in the US, but should provoke fresh sell-offs in global equities, which would in turn accelerate further unwinding of the yen and Aussie carry trades.
The weekly chart shows two key negatives on a technical level, with the MACD having made a bearish cross-over even though both are above the zero line, suggesting the downtrend is cemented but remaining ample. The second negative technical aspect is shown through the breach of the 10-month trend line support. The aforementioned analysis of a potentially negative US payrolls report, coupled with expectations for a negative trade gap may also help fuel renewed USDJPY declines towards 115.55 and the 100-week average of 115.13.
The USDJPY daily chart suggests that any rebound is limited at the 1-week trend line resistance, with pressure acting at 117 and 117.65. Upside extends to 117.65 in the event of an upside surprise in payrolls.
Having broken the 11-month trend line resistance of 67.66, EURGBP hovers at 68.10, facing pressure at 68.40, which is the 61.8% retracement of the 70.19-65.34 decline. We expect renewed gains to target the 68.40 objective, with downside limited at 67.80 and 67.60. An expected rate hike from the European Central Bank tomorrow, contrasting with no action from the Bank of England should help fuel the upward move.