FX Update: USD boost fizzling after payrolls blowout.

FX Trading Focus: US jobs data shocks expectations, USD reaction telling, Riksbank focus this week

US jobs report a positive shocker. The market “lean” going into the US January jobs report on Friday was for a weak payrolls print, given the known impact of the omicron variant of covid on activity in some areas of the country and after an ugly -300k print in the ADP private payrolls number last Wednesday. Instead, we got a +467k print for January and a massive +700k revision to the November and December payrolls numbers. These large upward revisions will offer support for the idea that the participation rate is normalizing a bit more quickly again after extraordinary pandemic benefits expired in September. That is: at least for that portion of the labor market that was held away from work due to generous benefits. Indeed, the participation rate rose +0.3% as the labor force expanded, a positive driver of the unemployment rate ticking up to 4.0%. The average hourly earnings were a mixed read: hot +0.7% month-on-month growth and +5.7% year-on-year readings, but flattered to a degree by weekly hours worked (the denominator) dropping 0.2 hours – that is unlikely to repeat. Still, it is an inflationary report, all in all, and US yields jumped higher all along the US yield curve, with the market now pricing in over 30 basis points of tightening now at the March FOMC meeting and the 10-year yield pulling to a new cycle high. The curious thing was the lack of a more sustained US dollar reaction – a rather feeble performance suggesting that the US dollar may find it difficult to appreciate from here on yield spread widening as the Fed is priced to do more, and quicker. That possibly leaves misery and weak risk sentiment as the only potential support for the greenback now.

Riksbank – as argued below, Sweden has note escaped the hot inflation numbers in evidence virtually everywhere else and the SEK could be in for a major boost if the Riksbank affirms what the market is already positioning for: that it will have its own capitulation moment on the need to tighten policy. SEK has likely been held back lately by its correlation with risk sentiment, otherwise it would likely have traded far stronger: can the Riksbank overwhelm this source of SEK softness with a solidly hawkish meeting on Thursday?

Chart: USDSEK
An interesting SEK pair to watch this week in addition to EURSEK. Swedish short rates have tracked short EU rates higher with close correlation, but the sharp recovery in the euro post ECB also saw the EURSEK pair bid back into the higher range. Observers are split on whether the Riksbank is set to keep its QE purchase target unchanged and/or bring forward the anticipated time frame of rate lift-off (currently not until Q4 2024!). Arguably, doing so now would be front-running the ECB, which plans to review its inflation policy in March, but surely the Riksbank needs to buy some credibility on the inflation front as well after their core inflation rate hit its highest level since the 1990’s, and can feel far more comfortable in doing so with EURSEK near 10.50 rather than sub-10.00? Pure EURSEK trades are one way to express SEK strength, but USDSEK is potentially another one after the nice symmetric reversal pattern. This pair could head back toward 8.75 in a hurry if the Riksbank also capitulates on the need to tighten policy.