TD Securities analysts argue the US Dollar (USD) faces asymmetric downside risk around the April US payrolls release. They note US Dollar Index (DXY) has been rangebound with low volatility, and see limited upside even on strong jobs data, as Federal Reserve (Fed) rate cuts are largely priced out and inflation, not employment, is driving Fed expectations.

Dollar downside risk into payrolls

"Since the first week of April, the USD has traded in a tight band. Using the DXY index as a proxy, the USD has closed on a 98-handle every day since April 8. Compressed USD realized vols have kept a lid on front-end implied vols."

"Based on high-frequency employment data such as weekly ADP and continuing claims, many market participants already expect some improvement to show up in this payrolls report. The Fed's inclination to hike rates also leans more on how much the energy shock from Q1 will pass through to core inflation, rather than on labor market conditions. With Fed rate cuts pricing largely removed now, the CPI data release next week should matter more for the Fed hawks and USD bulls, in our view."

"The USD faces asymmetric downside heading into payrolls. Extent of USD downside in the near-term will depend on Middle East developments. Positive employment data surprise likely won't lead to significantly higher USD, as Fed rate cuts have been priced out and inflation data matters more for Fed rate hike pricing."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)