- The Aussie Dollar treads water near one-month lows after having lost more than 2% this week.
- China’s Caixin manufacturing PMI confirmed that the sector’s activity contracted in July.
- The NFP, due later today, is expected to show a slight moderation in job creation in July.
The Aussie Dollar remains depressed near one-month lows at 0.6425 against its US peer, consolidating losses after having depreciated beyond 2% so far this week. A mild risk aversion and more downbeat data from China are weighing on the risk-sensitive AUD ahead of the release of the US Nonfarm Payrolls report.
Market sentiment remains subdued on Friday as US President Trump signed a new list of trade tariffs that will come into effect next week. Australian products will face a benign 10% levy, but the hefty 50% tariffs to China, Australia's main trading partner, are expected to weigh on Australia's trade-oriented economy.
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
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.
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.
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.
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.
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.
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