November NFP: Scenarios & FX Trades – RBS

RBS trading desk economists forecast non-farm payroll growth of 200K in November, slightly above the prevailing trend and consistent with a further diminishing of labor market slack.

Scenarios and Trades:

“225k and above: The USD strengthens broadly as a December FOMC rate hike expectations are locked in. We think short AUD/USD is attractive given the disconnect between the AUD strength of late and the continued fall in iron ore prices.

150-225k – The consensus estimate and our house view (+200K) sit toward the top end of this range. Such a result would also be consistent with a December FOMC rate hike, as it would be close to the prevailing trend – the three-month moving average of NFP gains currently sits at +187K. On a broader level, we think there has been a breakdown in the market sentiment that the BoE’s MPC will “follow” the FOMC, leading short-term interest rate spreads to move signficiantly in favor of the USD vs. the GBP. That shift should be heightened by an employment report that is good enough to tighten FOMC expectations but not good enough to drag up expectations of its peers across the pond. Short GBP/USD.

150k and below – Short EUR positions were squeezed sharply following the December ECB decision, and we think there are risks that a short-term positioning squeeze could be compounded should we see a disappointing US employment report. Monetary policy divergence may continue to be a long-term driver of EUR/USD downside, and we are confident in our bearish medium-term short EUR view. But short-term positioning looks exposed. Long EUR/USD,” RBS advises.

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