This Is The “Linchpin” For The Dollar

Want a reason to get long USD? You know, besides widening rate differentials?

Well how about a better average hourly earnings print in Friday’s February jobs report? That would probably help buoy the greenback.

Recall that the average hourly earnings number was the most talked about part of the January jobs report. Indeed, many a market observer pointed to weak AHE as “proof” that the Fed wouldn’t/couldn’t/shouldn’t hike in March. So much for that, right?

Anyway, Bloomberg’s Chris Anstey thinks you should likewise pay attention to AHE this morning – especially if you’re trading FX. I’d also ask that you think back to what I said last month about AHE and the greenback.

Via Bloomberg

Friday’s U.S. payrolls report might have little bearing on next week’s Federal Reserve decision, after top officials clearly indicated readiness to raise rates March 15. But it still has power to sway the outlook thereafter –especially for 2018 and 2019 in the “dot plot.”

  • In the release’s slew of indicators, average hourly earnings could be key. With consumption and inflation still below par, policy makers likely want to see sustained strength in pay to lift their current trajectory for the federal funds rate target
  • With the ECB and BOJ signaling that restrained pay rises in their economies mean they’re not going to take back monetary stimulus for some time, American wages are the linchpin for the dollar
  • For the BOJ, firm price gains backed by stronger wages and consumer spending are needed before boosting yield-curve targets, in the view of some officials, according to a Bloomberg report Thursday — a signal Japan isn’t preparing to rein in stimulus
  • Also Thursday, ECB President Mario Draghi emphasized that wage growth is key for inflation in Europe, in sticking to his forward guidance that rates will stay low even after a pick- up in consumer prices
  • U.S. wage growth weakened in January to just 0.1 percent on a monthly basis; Evercore ISI Chairman Ed Hyman sees it jumping to 0.4 percent for February
  • Wage gains finally kicked higher in 2016, to an annual pace of 2.6% from 2.1% over the prior three-year period. At least matching that 2.6% would offer policy makers confidence labor-market tightness will feed through to spending and inflation
  • Stronger pay rises could seal the case for the Fed’s dot-plot of officials’ projections to incorporate four rate hikes for 2018 instead of the current three — bullish for the dollar vs yen and euro
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