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FX Update: Increasingly two-way traffic for USD until FOMC?

Forex
Strats-Hardy-88x88
John Hardy

Head of FX Strategy

Summary:  Friday’s US jobs report showed solid US payrolls growth and a far hotter than expected jump in average hourly earnings, and yet US yields and the US dollar couldn’t sustain the kneejerk reaction, perhaps in part as the data was more mixed than the headlines suggest. Regardless, markets seem to only have eyes for a coming soft landing narrative. Still, the week ahead may offer little further fuel to drive that narrative ahead of next week’s U. Tonight, the Reserve Bank of Australia meets, with market observers divided on the odds of another hike.


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FX Trading focus: USD fails to sustain a bid on November jobs report, but few drivers for bears this week ahead of next week’s CPI report and FOMC meeting.

There was a bit of something for everyone in the Friday jobs report, but conviction in the reliability of the data is certainly not one of the takeaways. For starters, the October Average Hourly Earnings was revised sharply higher to 5.6% from the original 4.7% - which if nothing else suggests we should take the latest data in the AHE series with extreme caution – tough to trust a number that can be revised that much in the space of a month. Then, the November Average Hourly Earnings data came in hot at +0.6% month-on-month vs. +0.3% expected, although almost all of that can be explained by the denominator (average weekly hours) dropping by 0.1 hours. Had it not, the number would have been in-line with expectation. Then there is the ongoing discrepancy between the establishment survey that calculates the nonfarm payrolls change (+263k vs. +200k expected, with a modest -23k revision for the prior two months’ data)

So the market quickly wiped away the kneejerk sell-off in US treasuries and rally in the US dollar and the greenback extended a bit weaker still in places in the Asian session overnight, encouraged in part by a steep plunge in USDCNH as China continues to announce opening up measures. By the way, the further plunge in USDHKD that has taken that exchange rate all the way back toward the low of the band after it was pegged at the top of the band for months and the HMA was intervening with tens of billions of USD suggests

The data calendar this week for the US is sparsely populated after today’s ISM Services (expected at 53.3 and thus the lowest since the pandemic wipeout months of the spring of 2020, with all eyes on the November CPI report next Tuesday followed by the FOMC meeting the following day.

Tonight – Tuesday in Asia – we have an RBA meeting, with the market divided on the prospects for another 25 basis point move from the Philip Lowe and company, but leaning that way – more below in the AUDUSD chart discussion.  The steep recovery in the Euro has helped ease ECB expectations for next Thursday’s meeting toward 50 basis points. Given the excess pressure on the European economy from higher energy prices, I have a hard time seeing EURUSD upside on anything save for easing financial conditions/risk sentiment generally, not because we will be able to put together a positive spin on the relative outlook for the EU economy any time soon now that we have achieved a resetting of most of the intense pessimism directed at Europe since the Russian invasion of Ukraine.

Chart: AUDUSD
The Australian dollar should have found the recent backdrop supportive: rising metals prices and improving risk sentiment in the region on signs that China is accelerating its opening up measures. The main Australian index last week even traded within a few percent of all-time highs (in AUD terms). But the chief restraint on the currency is the RBA, which continues to fret the impact of further tightening on household budgets as the adjustable rate mortgages reset from here. The market is divided on whether the RBA hikes 25 basis points to take the rate to 3.10%. With no pressure on the currency outside of the crosses (i.e. AUDUSD well off the lows) and with Australia data tepid of late on the consumption side, I wouldn’t be surprised if the RBA skips hiking tonight, or if it does, fails to alter forward guidance much. Interesting to see that AUDUSD struggling for new highs here ahead of the RBA tonight and ahead of the 200-day moving average up above 0.6900. I suspect global liquidity/risk sentiment and the USD will be in the driver’s seat here rather than any significant surprise from the RBA.

05_12_2022_JJH_Update_01
Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
More of the same, as the USD drops further (although bears may run a bit dry of fuel until the big test for the greenback next week) and CAD continues to post the strongest negative trend readings, while the NZD likely faces a big test over the RBA tonight (AUDNZD flows likely behind much of the NZD strength of late).

05_12_2022_JJH_Update_02
Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
USDJPY hanging on to the 200-day moving average (currently near 134.60), if with a bit of slippage late last week and overnight – the “decider” there likely to be the 10-year US treasury yield benchmark and the 3.50% level.

05_12_2022_JJH_Update_03
Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights

  • 1330 – Canada Oct. Building Permits
  • 1445 – US S&P Global Nov. Final Services PMI
  • 1500 – US Oct. Factory Orders
  • 1500 – US Nov. ISM Services
  • 1600 – ECB's Wunsch to speak
  • 2330 – Japan Oct. Labor Cash Earnings
  • 0330 – Australia RBA Cash Target

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