FX Update: Mixed US jobs report could embolden USD bears
Head of FX Strategy
Summary: The headline payrolls change number out of the US handily beat expectations, but other aspects of the June jobs and earnings numbers were mixed to weak, so this was not the blowout report some might have been hoping for. The numbers will not lead to any new spike in US treasury yields and USD bears may feel emboldened after this latest leg of USD strength seemed out of proportion with the lack of developments elsewhere.
FX Trading focus: USD bears may try to get back in business here.
Just a very brief update today, as I wanted to get a glance at the US jobs numbers before penning any thoughts as I am away all of next week. While the June US nonfarm payrolls change handily beat expectation at +850k vs. the +720k expected (and net revisions of the prior two months added 15k), there were far less positive signs elsewhere, with no change in the labor force participation rate continuing (still bogged down at over 1.5% lower than it was pre-pandemic and going nowhere for a full 12 months now, suggesting there are some workers that aren’t coming back – possibly retirees.) And the headline unemployment rate punched 0.3% higher to 5.9% - a real headscratcher suggesting a net shrinking of jobs, given the lack of change to the participation rate. Earnings were in-line with expectations about and the weekly hours work drop on top of a slight downward revision has taken a solid amount of steam out of that particular data series. Shortly put, this is note
Yesterday I said it was tough to build a narrative around the latest extension in USD strength and this jobs report offers no fresh reasons for selling the US dollar, perhaps the contrary. We may have simply witnessed a significant position squaring by USD shorts as so much energy has come out of the inflation narrative recently, with the USD wrapped up in a reflexive way in that narrative as one of the leaders in weakening via negative real rates. Still, let’s not forget that we saw the highest ISM Manufacturing Prices Paid print yesterday for the June survey since 1979. Today’s jobs report doesn’t do anything to set the world on fire in terms of raising Fed expectations or treasury yields, and given the pivotal levels we have traded near lately in a number of USD pairs, may offer a fresh spot for new USD bearish positions if these levels that we somewhat oddly manage to arrive at can’t hold. I may be too early on that account, but the next couple of session look important from a “stand or fall” perspective for the US dollar, given the levels the USD resistance levels that the greenback has approached or slightly broken in a nearly every USD pair:
- EURUSD (break below 1.1850 does it hold today and early next week and if not, do we go on to approach the key 1.1705-1.1780 zone.)
- USDJPY – does the 111.00 break hold and why should it if US and other safe haven yields are falling again
- AUDUSD – the local 0.7475 break and the huge 0.7400+ area prior high as support in play
- USDCAD – major resistance between 1.2400-1.2500
- GBPUSD – the 1.3787 level broken this week and the huge supports of the 200-day moving average coinciding with the range low of 1.3670 this year.
Elsewhere today, we have ECB President Lagarde out sounding dovish and in no mood to send signals on a tapering of purchases, which has helped EU sovereign yields sharply lower today as the backdrop tries to provide as little support for the euro as possible.
EURUSD is fairly representative of the action across USD pairs as we watch whether this extension lower below the local 1.1848 pivot holds into the weekend. A solid rally back above is the first inkling that this late USD rally faces neutralization. And the kind of support from US treasury yields and rising US real yields that was in place back into the significant end-of-March low of 1.1704 are largely absent this time, with only support for the USD from the shift in Fed expectations, a shift that has faded more than a bit on today’s mixed US jobs report. A solid close above 1.1900 in the coming session or two could set the stage for the sense that the downside risk here has been avoided for now, likely reflected in other USD pairs as well in that event.
Table: FX Board of G10 and CNH trend evolution and strength
It would take some time to turn the strong USD, but we’ll watch for the risk of a turnaround into next week after today’s US jobs report, as it will prove interesting whether the commodity currencies take up leadership, or the CHF, JPY and the Euro on a further cratering of safe haven bond yields.
Table: FX Board Trend Scoreboard for individual pairs
It would take some time to reverse USD trends in the individual pairs, but that, together with any shift in the recent rash of negative JPY flips of the last couple of weeks are what we will be watching if we are at a new inflection point here.