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US Non-Farm Payrolls: BOA Merrill liking a USD long

Latest client note from BOAML from our friends at 5 May 2016

Non-farm payrolls preview:

Nonfarm payroll growth likely posted a solid 200,000 in April, driven once more by service-providing firms. Of this, government hiring likely contributed 5,000, which is a more modest clip than the 20,000 pop in March. We find support to our outlook from the push lower in jobless claims and improvement in the Conference Board's labor market differential measure. There may be a payback in manufacturing jobs after two sizeable declines in February and March, but the early manufacturing survey data have been mixed. Housing starts have recently slowed, which could lead to a slower pace of construction hiring. We also expect continued contraction in mining jobs.

We look for the unemployment rate to hold at 5.0%, assuming the participation rate holds steady. However, there is a risk it heads higher, following the recent trend, which could boost the unemployment rate. The participation rate has seen an impressive recovery since September of last year, rising to 63% from 62.4%. A robust labor market has attracted many workers back into the labor market, and it is more likely than not that this trend generally continues in the near term. However, increased labor supply also means delayed wage pressures: we are looking for only 0.2% monthly growth in average hourly earnings. This would leave the yoy growth rate unchanged at 2.3%, though this is still greater than the 2% pace seen earlier in this cycle. Average weekly hours should tick up to 34.5 from 34.4.

FX: tactically long dollar into payrolls.

We recommend being tactically bullish the dollar ahead payrolls. The solid employment report we expect (NFP +190k) will leave the 6mma average at a healthy 224,000 evidence of continued labor market tightening. We expect wages to rise a healthy 0.2%, leaving the y/y change stable at 2.3%. Stability is not great but better than deceleration, which amidst a generally improving trend in wages is enough to keep the Fed on track for a June hike.

Relative to a market that's only pricing a 36% chance of a June hike, this could see the USD supported. Additionally, aggregate USD positioning (according to CFTC data) turned net short the dollar for the first time since May 2014. While we will need to see a more significant change in Fed rhetoric to rally significantly, there's room for a tactical rally. Our Quant and Technical analysis also points to room for a near-term USD rally.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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