Will taper calls grow louder after tomorrow's US Jobs report?

Tomorrow's number will provide us with further insight into the labour market recovery, which still remains around 6.8mln lower than it was pre-pandemic. The labour market has some interesting factors to contend with from seasonality related effects to the expiry of benefits across certain states as well as the higher cases of delta potentially keeping some at home. We know that jobs data is the one which Jerome Powell places the most weight on currently for tapering QE and he recently shared his views about it having some ways to go as well as hoping for further improvement in the participation rate. There was also some hawkish rhetoric out from Fed Governor Waller who in an interview on CNBC mentioned that if the next two months of jobs reports prints around 800k-1mln then in his books substantial progress would have been met - leading to a September announcement and actual tapering in October.

Expectations are for 880k which would be a 30k improvement on last month’s figure. I think anything north of 1mln with an uptick in the participation rate would ramp up calls for a September taper announcement, leading to a repricing of the US 10-year yield higher. We’ve got two appetizers before the main course in the form of the ADP report and Jobless Claims data. The ADP number came in at 330k, much weaker than the expected 695k. However, it doesn’t have the greatest track record for its predictive prowess and has regularly underestimated Non-Farm Payrolls in the past. After seeing the reaction in US 10-year yields (sliding down to the July lows around 1.13%), I’m confident Friday’s number, whether a significant beat or miss it will cause plenty vol in bond land. Influential Fed Vice Chair Clarida has come to the rescue with some unexpected hawkish words, saying conditions for rate hikes could be met by end of 2022 and that he can certainly see the Fed announcing tapering later this year. Jobless claims were on the positive side with initial claims just off expectations and continuing claims finally breached the 3 mln mark (beating expectations). Speaking of yields - what are some of the instruments which will be impacted? The dollar for one certainly will be impacted, you also can’t have a discussion about yields and not include the dollar/yen cross and lastly the shiny yellow metal has a high beta towards rates.

DXY:

The dollar has perched its head slightly above the mini range between 91.8 and 92.2, with the 50-day SMA and 21-day EMA just below and above respectively applying further support and resistance. Bulls will be hoping for a strong print so the 91.5 and above area can be defended. Despite the recent pullback with both price and the 50-day SMA above the 200-day SMA, the trend remains up. The RSI needs to get back above the key 55 level, for now it is bumbling around the 50 area. Targets to monitor, on the upside 92.2 (21-day EMA) and 92.5. For moves lower, I’d keep a close eye on the horizontal support around 91.5 and the 200-day SMA lower.

USDJPY:

The dollar yen pair has been traveling in a southerly direction, contained within its descending channel or for USDJPY bulls a bullish flag. Price slid below the 109.16 horizontal support today, but has retraced this move and eyed the 109.5 zone as US yields ticked higher after Clarida’s commentary. The RSI is also trying to reclaim the 46 level decisively. The 21-day EMA did cross below the 50-day SMA, however, this could be reversed on bullish price action. My targets for this cross would initially be 109.5, then 110 between both the 21-day EMA and 50-day SMA. On the downside, 109 would be my first target then lower from there, 108.5 has been a sticky price floor in the past and below that the 23 April low around 107.4 would be of interest.

Gold:

Gold has been in a tight range between $1800 and $1830 with some very lacklustre price movement. Price keeps knocking on $1830, but is struggling to see a sustained move through here with the 50-day SMA providing a bit of a resistance headwind too. Bears may be licking their lips as the 50-day SMA is starting to point lower and close to a death cross with the 200-day SMA if this continues. There could also be a little double top pattern forming. The RSI is also finding resistance around 55. Yes, real yields are at record lows, but this also creates an asymmetric risk of a higher move, due in my opinion to there not being much juice left in moves lower. Targets on the downside would be $1800 and $1750 with upside moves eyeing $1830 and $1860. I’m still of the view that gold is a solid candidate for a short the rallies approach.