US Dollar: Payrolls risk supports near term gains – OCBC

OCBC’s Sim Moh Siong and Christopher Wong highlight that resilient US data, elevated Treasury yields and higher Oil prices are keeping the Dollar supported. They flag this week’s US labour market report as the key event, with a potential upside surprise in payrolls reinforcing Fed tightening expectations.

Fed expectations hinge on payrolls

"This week's US labour market report is the key event risk. Bloomberg consensus expects nonfarm payrolls to rise by 90,000 in September, down from 162,000 in August, while the unemployment rate is forecast to remain unchanged at 4.1%. Although Fed Chair Kevin Warsh has highlighted the four-week average of initial jobless claims as a timely indicator of labour market conditions, payrolls remain the market's preferred measure of labour market health."

"Our base case remains for a moderate USD rally into year-end. Markets are currently pricing almost four Fed rate hikes over the next year, which appears overly aggressive unless demand-driven inflation re-emerges as the dominant force behind price pressures. Wage growth and rental inflation will be critical indicators to watch."

"Our constructive USD view is tempered by two factors: ongoing gradual CNY appreciation and improving prospects for JPY strength as Japan's policy backdrop becomes more supportive. Nevertheless, the dollar could overshoot in the near term if Middle East tensions continue to lift energy prices and inflation concerns become more entrenched."