The US dollar has certainly shown some better resilience this week although the gains recorded yesterday have reversed so far today – a possible delayed reaction to the steady stream of weak labour market data ahead of today’s nonfarm payrolls report. The DXY is still a touch stronger this week (0.3%) despite the fact that US yields have declined – very modestly admittedly (above 3bps on the 2-year).

Risks look to be skewed in favour of data pointing to greater weakness

"The obvious conclusion here is that the US rates curve has a lot priced – 120bps of cuts over the next eight FOMC meetings and hence the appetite to react to the weak jobs-related data so far this week has been muted. But there remains only 7bps of easing priced for three rate cuts this year and we certainly see scope for that emerging if the jobs data continues to deteriorate. An NFP print today close to zero or negative would see a third FOMC cut this year priced very quickly, which in turn would likely see the dollar renew its decline."

"There is a chance though that the dollar could see muted declines even in that scenario. The 10% drop of the dollar in the first half of the year was from very over-valued levels and while still over-valued the dollar is now at levels where external factors could play a more influential role in performance. The French confidence vote on Monday is likely to result in the collapse of the government that creates doubts over the appetite to buy the euro post-payrolls. "

The US dollar was helped yesterday by the fact that the overall ISM Services index jumped more than expected. In particular, the New Orders index jumped sharply, to above the 56-level for the first time since last year. But once again, like with the ISM Manufacturing report, while many measures showed some recovery, the Employment indices of both were weaker than expected. The ADP employment report was weaker too as was the JOLTS report – so risks look to be skewed in favour of data pointing to greater weakness than expected.