Head of FX Strategy
Summary: Yesterday, the US dollar perked up far more sharply than did Fed rate expectations on the release of strong US data, perhaps as the market wanted a look at the official May jobs report today before reacting. With Nonfarm payrolls growing a bit more slowly than expected, the USD is reversing back lower on reduced odds that the Fed will need to shift its guidance at the June FOMC meeting.
FX Trading focus: USD bears find encouragement in softer than expected NFPs.
Yesterday’s trio of strong US data releases – a sub-400k weekly initial jobless claims, an eye-popping +978k May ADP private payrolls change and a new strongest-ever May ISM Services survey (with no concerning drop in the employment sub-index) – boosted the US dollar sharply, even if the move in US yields was rather modest. In part, the restraint in rate expectations reactions made sense as traders likely wanted a look at today’s official May nonfarm payrolls change data before reacting more strongly. That number was a tepid one at 559k vs. over 650k expected (net revisions of the prior two months at +27k), which doesn’t indicate anything approaching the huge growth in the ADP numbers and thus will leave many traders comfortable with the idea that the Fed will not need to get more aggressive at the June FOMC meeting on signaling a tapering of asset purchases. Yes, in a historical perspective, +559k of jobs growth is a huge one, but we are talking about the very heart of the re-opening months with many states eliminating access to federal benefits. We’re probably only a few months from the inevitable huge slowdown in the payrolls growth.
I am writing this in the minutes immediately after the jobs data release, so I won’t try to speculate on whether the knee-jerk reaction has it right as the USD was sent sharply, if rather modestly, lower. I’m not sure we will see much drama in USD downside, but a weak close does point the needle lower rather than higher for the US dollar. Traders are still going to be wary with next Thursday’s CPI release remaining ahead of the June 16 FOMC meeting. As well, the Average Hourly Earnings rise in May could get lost in the shuffle but shouldn’t: year-on-year data can be confusing when the comparison is with the pandemic breakout panic phase last year – but the last two months’ data have shown some pretty staggering month-on-month gains of +0.7% in April and now 0.5% in May.
Chart: AUDUSD
The USD rallied broadly yesterday, and one of the more interesting USD pairs was AUDUSD, which finally punched out of the very constricted range of the last many weeks in its move well below 0.7700 ahead of today’s US May jobs report. But…every directional move of late has petered out almost immediately and yesterday’s sell-off may see yet another quick reversal if the pair closes back well above 0.7700 today – suggesting that weak longs merely got shaken out yesterday and that this somewhat tepid payrolls data will leave the Fed happy to maintain course and not over-do any taper talk at the upcoming June FOMC meeting. The trouble tactically, however, for anyone look for a more profound move higher is that traders may also wait to see if the Fed delivers the all-clear on June 16 before trading with conviction on the long side.
Table: FX Board of G-10+CNH trend evolution and strength
The table below presented merely per habit – trends are very weak in most currencies and yesterday’s strong move higher in the USD finding itself partially reversed today is helping to keep the USD situation very shifty. Elsewhere it isn’t much better as the JPY has firmed a bit after recent weakness (and could firm further if US treasuries maintain the range here). The USDJPY rally yesterday has been almost fully tamed as of this writing. We’ll update the trend overview for the individual currency pairs on Monday. I suspect we could be building for some trending moves post-June 16 FOMC.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
