FX FX FX

FX Update: USD shrugging off hawkish Fed ahead of jobs report

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  As the more hawkish than expected FOMC minutes from Wednesday have failed to trigger any widespread deleveraging outside of the most speculative corners of asset markets, the US dollar has failed to add to the gains inspired by the kneejerk reaction to the minutes and the marking higher of Fed expectations for policy hikes this year (as well as long yields also lifting). Today, we look at how the market will treat what should be a strong nonfarm payrolls change number and the latest earnings data.


FX Trading focus: USD shrugging off hawkish Fed after kneejerk, Hot EU inflation

The hawkish FOMC minutes from Wednesday have so far proven not hawkish enough to trigger  more than the one-off adjustment in the US dollar that seems to be fading quickly as we look toward today’s US December  jobs report (more on that below). At the same time, risk sentiment remains broadly stable, speculative- and highly interest rate-sensitive US equities generally aside. This is intriguing as the implication is that as long as US yields and Fed expectations are able to march higher without spooking asset markets, the US dollar may fail to rally and could even weaken, though we need to get EURUSD up out of the sub-1.1400 range for a more interesting signal on that front.

Additionally, for the cycle we have to wonder if the Fed is the cart or the horse here, something that it may itself not understand, as it has already shared its lack of understanding on how its balance sheet affects the economy (though we seem to have a good idea how it affects financial markets – and the standing repo facility of some $1.5 trillion offers the Fed quite a large safety valve for how tapering and possibly a quick move to reducing the balance sheet will affect treasury market and asset market dynamics). Put another way, the economy will pull the Fed this way or that on interest rates more than Fed policy will impact the data, as policy moves only hit with a significant lag of 9-12 months.

Speaking of data, the next step for the USD and market is the December jobs report later today, with the market likely leaning now for quite a strong figure, given the six-month high ADP December private payrolls change number released on Wednesday at +807k. That puts the two-month total for the Nov-Dec ADP private payrolls change at over 1.3 million, while the official BLS nonfarm payrolls change total was a tepid +210k in November. Today’s December tally is expected to show about +450k of payrolls growths. But note: the “two-month net revision” number bears watching, as the US Bureau of Labor Statistics has had difficulty collecting data over the last year and has consistently underestimated the pace of jobs growth, with every month since July seeing growing positive revisions, from a +119k revision in August to a +235k revision in November.

As well, the Average Hourly Earnings data deserves watching, with the market looking for +0.4% month-on-month growth and a sharp drop to +4.2% year-on-year due to the basing effect of a significant surge in December 2020. The official unemployment rate is based on an entirely different “household survey” and its plunge to 4.2% in November from 4.6% in October, together with a labor force participation rate that has not normalized to pre-pandemic levels, tells its own story of labor market tightness. Analysts suggest that the generous benefits and spectacular portfolio gains since the pandemic outbreak have taken millions of older workers near retirement out of the work force, never to come back. In the pre-pandemic cycle, it took a full two years for the unemployment rate to drop from 5.0% to 4.2%, a feat that was accomplished in three months last year.

Elsewhere, we have the latest hot EU inflation numbers (Germany surprising with rise to 5.3% CPI year-on-year in December vs. 5.1% expected and 5.2% in November and the EU estimate today out at 5.0% vs. 4.8% expected and 4.9% previous). which are piling on the pressure for the ECB to eventually cave. ECB governing council member Kazaks was out Wednesday claiming the ECB was ready to signal policy tightening if the inflation outlook rises, even hinting at an early 2023 rate hike. That would have carried about ten times the impact had it been Lagarde or Chief Economist Lane.

Chart: EURGBP
Sterling has worked its way stronger over the last three weeks against the euro and the US dollar, perhaps on its hands-off approach on the spread of the omicron variant relative to the responses elsewhere, particularly in mainland Europe, where gatherings and activity have been severely limited in many countries. Still, EU-UK yield spreads at the front of the curve have not shifted notably over the last three weeks in sterling’s favour, so some of the additional pop here to start the year on sterling may have to do with investors allocating more capital the UK’s way. The EURGBP pair has traded below the prior cycle low near 0.8380, leaving only the major range support back since the Brexit vote of late 2016 near 0.8275 as the next focus.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength
Still waiting for a pulse from the US dollar in either direction – perhaps we get one today in the wake of the US jobs data? If the US dollar does weaken and risk appetite remains strong, the G10 smalls are ready for a bounce-back. Note the CHF showing signs of rolling over as well in momentum terms at least – need EURCHF above 1.0500 for more interest there.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
USDCAD has maintained the downtrend after a test this week as oil prices have kept CAD firm and there could be some policy catchup in the wings from the Bank of Canada, but a weaker US dollar still required for traction there. The USDCHF move back to positive is not interesting in the context of the rangebound chart there. Watching CNH crosses broadly as China may be set for more forceful policy easing signals.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1200 – Mexico Dec. CPI
  • 1330 – US Dec. Change in Nonfarm Payrolls
  • 1330 – US Dec. Unemployment Rate
  • 1330 – US Dec. Average Hourly Earnings
  • 1330 – Canada Dec. Net Change in Employment / Unemployment Rate
  • 1500 – Canada Dec. Ivey PMI
  • 1500 – US Fed’s Daly (Non-voter) to speak
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.