Forex 5 minutes to read

Payrolls matter more for the market than Fed?

John Hardy

Head of FX Strategy

Summary:  Today’s US June jobs report is highly anticipated as the narrative has developed that the data could prove the deciding factor for the size of the coming Fed rate cut at the July 31 FOMC meeting. But the payrolls change number may be more important for tactical traders than the Fed’s decision.


Market wrap

Hardly anything to wrap as yesterday US markets were closed for US Independence Day, with  President Trump calling for “unity” at a Fourth of July speech at the nation’s capital. US S&P futures trading at record highs for the cycle overnight, though the Asian session was rather lackluster heading into today’s important US data releases.

Trading interest

Note: Traders might consider using very short-dated options to protect USD shorts in lieu of market stops over the US payrolls release today…may result in more cost, but keeps the trade alive regardless of short-term price movement.

Maintaining USDJPY shorts with stops just below 108.50 

Maintaining half EURUSD long with stops below 1.1225 (looking to add early next week if >1.1350)

Maintaining long AUDNZD with stops below 1.0425 targeting minimum 1.0625, eventually 1.0700

Maintaining EURNOK shorts with stops above 9.675 for a look at 9.50 and lower eventually

How important are US payrolls today?

The market narrative has been dominated lately by the question of the size of the Fed’s rate cut at the July 31 FOMC meeting, in which the majority are still looking for a 25 basis move rather than a 50 basis point chop. And they see today’s US June jobs report, especially the June Nonfarm Payrolls Change number as the possible arbiter of the Fed’s decision at that FOMC meeting. (Note, as we have previously pointed out, that revisions of the prior two months’ data can carry additional weight on top of the headline release. We pointed recently to an article by the redoubtable A. Gary Shilling highlighting the importance of recent consistent negative revisions to payrolls change that suggest payrolls growth may have taken a cycle turn for the worst in April and that the US may even already be in recession.)

While the market may prove highly reactive to a surprise either way, I think it is already very highly likely that the Fed cuts 50 basis points at the July meeting for two reasons. First, despite the snowballing anticipation of significant Fed easing, the US yield curve has entirely failed to steepen, and in fact in recent days long yields have flattened more aggressively and reversed what looked like a budding steepening of the yield curve. A flattening yield curve suggests the fed is behind the curve in providing stimulus. Second, the US dollar has failed to materially weaken and is still not far from the multi-decade highs, according to the Fed’s measure of the trade-weighted USD, at least.

A pivot in risk appetite?

The complacency levels across global markets are remarkable. Equity markets are massively bid, corporate credit is complacent, and EM carry traders have been rewarded with spectacular returns. Two of the best performing currencies since the May 1 FOMC meeting are the Turkish lira, up over 10% carry adjusted versus the USD, and the Argentine peso, up over 15% over the same timeframe. So today possibly offers an important sentiment test in the even we get bad – and especially very bad – US jobs data and whether such data continues to egg on risk-taking from the perspective of lower rates and the anticipation of further easing from the Fed and other central banks, or whether the mentality changes on fears of an incoming recession and whether the Fed is still badly behind the curve.

Perhaps equally interesting would be a decent upside beat for the US payrolls number today and how the market digests that – are we in the upside-down world where US economic strength is the worst thing in the world for markets because it throws into doubt the progress of the oncoming Fed gravy train?

Chart: AUDUSD

Watching the key resistance zone in AUDUSD here as we ask the risk appetite pivot question above. If we have both weak US data and the market continuing to celebrate and even-lower, even-quicker Fed policy rate, as opposed to fretting the global growth downturn, then AUDUSD may continue to pull higher here – looks pivotal in this area between 0.7000- and 0.7100 either way.
Source: Saxo Bank
The G-10 rundown

USD – a lower path for the Fed quicker eventually USD negative, but again, the “rockiness” of the path is a critical question, as we have historical precedent for the USD serving as a safe haven even as the Fed aggressively cutting as the normal reason for the latter is a global deleveraging of risk assets.

EUR – looking for the euro to eventually turn higher versus the US dollar, but incredibly low interest rates and prospects for further ECB cuts don’t provide much inspiration. For perspective, the German 30-year sovereign bond has matched the drop bp-for-bp of the US 30-year yield despite the former trading below 25 basis points.

JPY – the yen rally fizzling slightly on the intense enthusiasm for risky assets globally despite yen normally tracking long US yields most closely. The rally in EM in particular throwing up a bit of a hurdle here as Japanese carry traders are enjoying strong returns on EM carry trades funded in JPY.

GBP – UK’s Services PMI this week barely indicating expansion – hard to believe the market pricing still rather low odds for a BoE cut at the Aug 1  and even Sep 19 BoE meeting despite recent Carney rhetoric.

CHF – the flap over the loss of EU access to the Swiss stock exchanges not driving much volatility. A key test for EURCHF if we trade near 1.1000. 

AUD – a tax cut passed earlier this week but looks like small beer in GDP terms and supply side measures won’t have much impact if the country is sliding toward a recession. Watching the risk appetite angle here as described above for whether AUDUSD is toppish here or can power higher. Ugly iron ore correction in China overnight seeing little impact on AUD so far.

CAD – as with AUD, CAD is bumping into an important resistance zone versus the USD here (1.3000 in USDCAD) and wondering if we need a further melt-up in complacency to drive immediate further strength in commodity dollars. Risk of mean reversion in Canadian jobs numbers points to risk of a weaker jobs report from Canada today.

NZD – prefer to view NZD through the prism of AUDNZD, where we note the recent backup above 1.0500 – technically promising for bulls (kiwi bears), with a fuller pull back to 1.0600 suggesting a more constructive medium term bullish outlook.

SEK and NOK – neither of the Scandies seeing immediate further momentum on their break higher versus the Euro as the two central banks are alone in the world in projecting higher rates. 

Upcoming Economic Calendar Highlights (all times GMT)

1230 – Canada Jun. Net Change in Employment / Unemployment Rate
1230 – US Jun. Nonfarm Payrolls Change
1230 – US Jun. Unemployment Rate
1230 – US Jun. Average Hourly Earnings
1400 – Canada Jun. Ivey PMI
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