Head of FX Strategy
Summary: Markets tried to dramatically extend the relief rally yesterday as the US debt ceiling issue has cleared up for now and on the hope that the energy price crisis will fade, but then crude oil prices rushed back toward the highs and US yields rose to new local highs. Cue the US September jobs report later today, which could drive a fresh bout of USD strength if solid payrolls growth, and further signs of rising wage pressures, drive an additional boost US treasury yields out the curve.
FX Trading focus: Well that didn’t take long. US jobs report on tap.
The “goldilocks” idea I floated yesterday only lasted a matter of hours, as the relief from the natural gas price reversal in Europe only spread into crude oil prices briefly before the latter ripped back toward the cycle highs. Further capping risk sentiment was a sharp rise in US treasury yields, which rose to new local highs ahead of today’s important jobs report. The boost to US yields saw the JPY falling fast. No big surprise there, as USDJPY trades into 112.00 again and may be ready for a sprint higher into the next major chart zone toward 114.50 if we get a potent jobs report that sets yields on the path to challenge the cycle highs (for example, the 1.75% area in the US 10-year).
As noted in this morning’s Saxo Market Call podcast, I will focus closely on the average hourly earnings data in today’s report after the last several months have shown elevated readings suggesting that earnings are rising at a greater than 5% clip. Any nonfarm payrolls change reading well north of the expected 500k plus an Average Hourly Earnings reading higher than 0.4% month-on-month today without an accompanying drop in the average weekly hours could add some urgency to the Fed’s tapering decision and pace at the early November meeting. The latest FOMC minutes are up next week and should add some further color on the state of Fed thinking heading into this jobs report.
It's an important day and close to the week for the US dollar, which has faltered in places even while maintaining the EURUSD downtrend and seeing USDJPY tickling the top of the range today. USDCAD is in an entirely different place as it pushed lower toward the critical 1.2500 area on the oil price rise, AUDUSD continues to eye pivotal local resistance at 0.7300 and GBPUSD the significant resistance zone in the 1.3600-50 area. If the data is indifferent relative to expectations and yields trade sideways or lower and risk sentiment continues to recover, the US dollar could be in for a significant breakdown versus the stronger batch of currencies. A jolt higher in US yields is the more interesting test of USD sentiment however – likely supporting further upside in USDJPY but perhaps only upside against the other currencies noted above if the higher yields spook risk sentiment at the same time. I will follow up early next week.
Chart: USDJPY weekly
Further upside is the logical scenario here if we get a strong US jobs report today that drives a further boost in yields. As noted above, the next key area for USDJPY is up into the 114.50. A terrible jobs report today and sudden cratering in yields would likely be needed if the USDJPY is to be tamed within the prior range.
Table: FX Board of G10 and CNH trend evolution and strength
As noted above, the US data today is interesting for whether the US dollar can establish a broader direction, as the current poles at the moment are the EUR, SEK and JPY on the weak side and the oil currencies on the strong side.
Table: FX Board Trend Scoreboard for individual pairs
Quite a number of USD pairs are poking into key levels beyond which the USD breaks down – AUDUSD has already flipped positive according to the FX Board trend logic, but the chart needs a hold into the weekly close above 0.7300. Elsewhere, note that even the heavily pressured NZD this week is trying to flip back higher versus the JPY as yields rise anew.
Upcoming Economic Calendar Highlights (all times GMT)
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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.
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.
