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FX Update: How the ducks will have to line up for the USD to sell-off.

Picture of John Hardy
John Hardy

Head of FX Strategy

Summary:  For the moment, the Fed tightening rhetoric appears to be unmovable, meaning supposedly that we’ll have to look through many months of softening employment data before we can expect the Fed to climb down from its hawkish freight train. In that light, today’s September jobs data may weigh little, barring huge surprises. It’s likely that only both a soft report today together with a softer than expected CPI number next week can reset the USD lower for a bit.

FX Trading focus: Can the USD be set for a set-back here? Only under the “right” surprises in data releases that also take US yields back lower again and risk sentiment higher.

As this update is out less than a couple of hours before the US September jobs data, there isn’t much point in trying to anticipate the quality of the data and the immediate market reaction. But the data will be important if the surprise is significantly large on either side, even if the full reaction function to a big surprise in payrolls and/or earnings will need to await at least beyond the initial hour of reaction and will need some kind of follow-on confirmation from next Thursday's September CPI print to get further traction. That is particularly the case if the jobs data is weak than if it is strong (as strong jobs and especially earnings data keeps the wage-inflation narrative spiral alive even if we get a softer CPI print next week). Still, it does seem that this very volatile market likes to react strongly to incoming data, so reserving judgment beyond the kneejerk could prove important today.

In particular, watching today if the Household and Establishment surveys jibe and whether we get any new surprises in the Average Hourly Earnings, which are expected to only rise +0.3% month-on-month and rise +5.0% year-on-year, which would be the lowest for the latter for this calendar year. Note that the Household survey is the one used to calculate the official Unemployment rate and only rose 0.2% off the cycle 3.5% low to 3.7% in August due to a strong +0.3% rise in the participation rate (more people registered as looking for work).

As for the Fed, yesterday’s speeches from no fewer than three FOMC voters suggest that all Fed members are on the same page in continuing to deliver a message of determination to see the inflation dragon slain before easing up. L

So, very interesting to see the resolution of the USD direction in coming days – a look at gold, EURUSD and GBPUSD suggests a climax reversal that could see follow through lower for the greenback, while the smaller currencies and USDJPY are all pointing to the USD wanting to gun for more upside near the top of the cycle. Note thoughts on AUDUSD (and likely USD direction in general) in the chart discussion below, and keep in mind that earnings season is coming up starting late next week and picking up thereafter. We are concerned that beyond temporary short squeezes in equities/risk sentiment on yields easing off at times and/or weak data, equity markets have yet to reprice for eventually recessionary earnings and the credit cycle beginning to bite.

AUDUSD an interesting pair that looked heavy on the cycle lows this morning before rebounding a bit ahead of the US jobs report today. A strong US jobs report and earnings, together with higher US yields and a CPI release that doesn’t move the needle next week are likely needed to prompt a new slide, perhaps eyeing the 0.6000 area eventually. Clearly weak jobs growth, indifferent or worse average hourly earnings, and a weaker than expected US CPI next Thursday, together with a celebratory surge in risk sentiment as treasury yields presumably drop. Remember that the RBA pivoted dovish and concerns remain on demand from China, where new Covid cases remain a threat as the cold season approaches in norther regions ahead of the pageantry of appointing leader Xi to a third term.

Source: Saxo Group

Bank of Canada’s governor Tiff Macklem was out speaking yesterday and noted the extremely tight jobs market and no signs of relief for now on the inflation front, with inflationary drivers increasingly shifting into services. He argued for further rate hikes and mentioned that hopeful signs that might eventually slow inflation, like falling commodity prices, are being offset by the weak Canadian dollar, suggesting that the Bank of Canada will have no choice but to continue to hike, even as growth falls. The expectations for the Bank of Canada meeting on October 26 jumped almost 15 basis points yesterday, with the market now priced for slightly more than 50 basis points at the meeting.

Table: FX Board of G10 and CNH trend evolution and strength.
Interesting test for USDJPY lies dead ahead if the US jobs data and US CPI next Thursday don’t take US treasury yields down a few notches. The G10 smalls are almost universally weak – interesting given the strong sentiment jump earlier in the week and oil’s comeback.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
AUDNZD continues the drama – retesting and bouncing once again off the key 1.1250 level. EURGBP is trying to flip back into an up-trend, but probably needs to pull north of 0.8900 again to reset after the climactic reversal. Too early to make a call on gold, EURUSD new “uptrends”. The bull-bear line tactically for EURUSD is now parity after this week’s action.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights

  • 1100 – Mexico Sep. CPI
  • 1230 – US Sep. Nonfarm Payrolls Change
  • 1230 – US Sep. Unemployment Rate
  • 1230 – US Sep. Average Hourly Earnings
  • 1230 – Canada Sep. Employment Change/Unemployment Rate
  • 1400 – US Fed’s Williams (Voter) to speak
  • 1500 – US Fed’s Kashkari (Voter 2023) to speak
  • 1600 – US Fed’s Bostic (Voter 2024) to speak


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