AUD/USD hovers near 0.6425 lows with all eyes on the US Nonfarm Payrolls

Weak manufacturing data from China is weighing on the AUD

In the macroeconomic domain, data released on Friday revealed that Australian Producer Prices rose at a 3.4% yearly rate in the second quarter, the softest reading since the third quarter of 2021.

The Aussie, however, was hit by further evidence of the weak manufacturing activity in China as the Caixin Manufacturing PMI declined to 49.5 in July from 50.3 in June, entering into contraction levels against expectations.

These figures confirm the grim NBS manufacturing activity figures released on Thursday, highlighting a decline in export orders combined with a weaker domestic demand that poses a significant threat to the country’s economic outlook.

The US Dollar, on the other hand, remains firm, buoyed by lowering expectations of Fed rate cuts, following this week’s monetary policy decision, and a cautious market, with all eyes on the US NFP report.

The market consensus anticipates a slowdown in job creation in July, with 110,000 new payrolls, from 147,000 in the previous month, and the Unemployment Rate ticking up to 4.2% from the previous 4.1%. The final figures will provide more cues about the Fed’s September meeting, and are likely to boost USD volatility.

Nonfarm Payrolls FAQs

What are Nonfarm Payrolls?

Nonfarm Payrolls (NFP) are part of the US Bureau of Labor Statistics monthly jobs report. The Nonfarm Payrolls component specifically measures the change in the number of people employed in the US during the previous month, excluding the farming industry.

How does Nonfarm Payrolls influence the Federal Reserve monetary policy decisions?

The Nonfarm Payrolls figure can influence the decisions of the Federal Reserve by providing a measure of how successfully the Fed is meeting its mandate of fostering full employment and 2% inflation. A relatively high NFP figure means more people are in employment, earning more money and therefore probably spending more. A relatively low Nonfarm Payrolls’ result, on the either hand, could mean people are struggling to find work. The Fed will typically raise interest rates to combat high inflation triggered by low unemployment, and lower them to stimulate a stagnant labor market.

How does Nonfarm Payrolls affect the US Dollar?

Nonfarm Payrolls generally have a positive correlation with the US Dollar. This means when payrolls’ figures come out higher-than-expected the USD tends to rally and vice versa when they are lower. NFPs influence the US Dollar by virtue of their impact on inflation, monetary policy expectations and interest rates. A higher NFP usually means the Federal Reserve will be more tight in its monetary policy, supporting the USD.

How does Nonfarm Payrolls affect Gold?

Nonfarm Payrolls are generally negatively-correlated with the price of Gold. This means a higher-than-expected payrolls’ figure will have a depressing effect on the Gold price and vice versa. Higher NFP generally has a positive effect on the value of the USD, and like most major commodities Gold is priced in US Dollars. If the USD gains in value, therefore, it requires less Dollars to buy an ounce of Gold. Also, higher interest rates (typically helped higher NFPs) also lessen the attractiveness of Gold as an investment compared to staying in cash, where the money will at least earn interest.

Sometimes Nonfarm Payrolls trigger an opposite reaction than what the market expects. Why is that?

Nonfarm Payrolls is only one component within a bigger jobs report and it can be overshadowed by the other components. At times, when NFP come out higher-than-forecast, but the Average Weekly Earnings is lower than expected, the market has ignored the potentially inflationary effect of the headline result and interpreted the fall in earnings as deflationary. The Participation Rate and the Average Weekly Hours components can also influence the market reaction, but only in seldom events like the “Great Resignation” or the Global Financial Crisis.