Head of FX Strategy
Summary: Yesterday’s strong private payrolls and jobless claims data were uncomfortable for a market expecting a weakening US economy and an imminent peak in Fed rates. Today’s official December jobs report will carry even more weight if nonfarm payrolls growth and earnings prove stronger than expected, with the ISM Services also up today. The JPY is the most sensitive to the US yield reaction. Elsewhere, the Chinese yuan is even stronger than the greenback on the latest policy hopes linked to the property sector.
Today's Saxo Market Call podcast.
Today's Market Quick Take from the Saxo Strategy Team
FX Trading focus: USD rises on strong ADP private payrolls, weekly claims data. Main event set for today, with ISM Services also weighing.
As the Fed Chair Powell himself noted in a speech on inflation late last year, the key risk for further inflationary pressures comes from the labor-intensive services sector of the US economy, so arguably the ISM Services survey should carry plenty of weight today, together with the usual focus on payrolls and earnings growth, with the market leaning for the risk of stronger data today after a very strong December ADP Private Payrolls print yesterday (+235k vs. 150k expected and a revision of November data to +182k from 127k) and with a very strong weekly claims number at 204k, the second-lowest print since May.
Chart: USDJPY
USDJPY is traditionally the most sensitive USD pair to US data, and would be even more so if any US data surprises today add more volatility to the longer end of the US yield curve, as opposed to mostly seeing the market marking the front-end of the curve a bit higher or lower. The rally off the sub-130.00 lows has run into its important first resistance area – the pivot higher near 134.50 and near a prior pivot low back in early December. The next resistance area is the important 138.00+ resistance from early December, although the 200-day moving average comes in well below there at 136.50. To rise significantly above the 136.50-138.00 zone, we may need to see a more significant jump in longer US yields, not just the front end of the US yield curve.
Swedish krona hitting the skids as the country pays the price for its housing bubble and as rising prices for power and cost-of-living have bankruptcies rising to their highest level in 10 years in the second half of last year. Retail, restaurants and hotels are especially hard hit. After Sweden built one of the most extreme housing bubbles of the small open economy that all built bubbles post-GFC, its currency is paying the price even as the Riksbank normalizes policy. Traditionally, the Swedish krona is one of the most sensitive currencies to global- and Euro area risk sentiment. But its recent weakness is on a different scale and begs consideration. One minor angle is that the “hawkish” deciding vote on the Riksbank, Governor Ingves, has been replaced by the somewhat unknown quantity of Erik Thedeen, the new governor and another new member, Aino Bunge. But Swedish rates have tracked European rates quite closely over the last couple of weeks. It is more likely that the market is concerned of a risk of a crushing recession and possible housing price debacle, one that would inevitably bring some sort of bailout if the risks turn systemic. We should have fireworks ahead for the Swedish krona this year with much at stake for government policy as much as Riksbank policy. Mark your calendars for the next Riksbank meeting on February 9.
China policy signals are coming fast and furious as the country is hunkered down amidst a massive Covid wave washing over the economy. The latest hope is that China is set to retire the “three red lines” that were announced all the way back in August of 2020 and were the first major signal of a crackdown on leverage within the property sector. The CNH has rallied further and even managed new highs versus a very strong USD overnight, although that move has pulled back slightly in the European morning. Is the excitement getting a bit overwrought here?
Table: FX Board of G10 and CNH trend evolution and strength.
The Swedish krona is trying to play a bit of catchup with the Norwegian krone to the downside here as the latter has been winded by the steep drop in crude oil prices here at the start of the year. Elsewhere, the yen has lost some altitude after the strong yield surge yesterday. And CNH strength has turned rather profound, with AUD catching hold of the yuan’s coattails.
Table: FX Board Trend Scoreboard for individual pairs.
Let’s have a look at where the USD pairs stand after the US data today, but the greenback is making a bid for a broader turn higher ahead of the data today. Elsewhere, note the wild extensions higher in EURSEK and EURNOK as the latter has traded to new 2-year highs this week and EURSEK trades above the highest daily close during the wild days of the pandemic outbreak in early 2020.
Upcoming Economic Calendar Highlights
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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.
