FX Update: Weak US treasuries after weak US jobs report merit most focus

FX Update: Weak US treasuries after weak US jobs report merit most focus

Forex 3 minutes to read
John Hardy

Head of FX Strategy

Summary:  The US change in nonfarm payrolls showed about half as much growth as expected, echoing the ADP number this week. This has triggered minor volatility in the US dollar, but the more interesting development is that US treasuries sold off again despite the weak data. This keeps the focus firmly on US treasury yields going into next week as a potential disruptor of the market narrative across assets, including in FX.


Today’s FX Trading focus:

A brief note on US jobs report and the US dollar
The US nonfarm payrolls change came in far weaker than expected at a mere +245k versus +460k consensus expectations, and thus the worst rate of growth in payrolls for the cycle since the pandemic outbreak. The unemployment rate dropped 0.2% to a new local low of 6.7% as expected, but that was on a simultaneous drop of the participation rate by 0.2% to 61.5%, pretty much a wash (and the 2% lower participation rate relative to pre-pandemic suggests real rate, including people likely not working at full speed, is closer to 10% or worse). Anecdotally, as I pointed out on this morning’s Saxo Market Call podcast, data from Homebase, an employee scheduling company with more than 100k small businesses enrolled, suggested hours work dropped and businesses began closing starting in late October, showing the first decline since March. The caveat there is that small business is not all business and other employers that have been big winners from Covid-19, like Amazon, are hiring in droves. Still, the data was not positive.

The volatility was not particularly noteworthy in the wake of the report in FX, with some minor USD strength in evidence before weakness came back in. But the more interesting development for all markets was the fresh weakness in treasuries despite the weak data, which is taking the 10-year treasury yield back toward the key highs since the pandemic outbreak – around 1.00% for that  10-year benchmark and 1.75% for the 30-year. US yields have been sufficiently rangebound for months to not act as a major input into the market narrative across asset classes, but it is our firm belief that this could change on any notable range break for the long end of the yield curve in US treasuries. Would this quickly trigger a value-momentum shift in equities in favour of the former, would it serve as a general risk-off driver akin to the. Or… is it USD negative on the assumption that the Fed will simply not allow yields to rise much higher before capping them with yield curve control, or even USD positive if the Fed sits on its hands a bit and US treasuries crowd out other financial assets?

I don’t have the answer to these questions, but a break higher in yields could prove a gamechanger for asset market volatility, which has recently ebbed in equities, and only picked up slightly in FX on the break down in the US dollar. Going into next week, keep at least one eye on the US treasury market and how markets behave if volatility picks up further there, and then how Fed officials react in various appearances, but especially during the December 16 FOMC meeting.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research 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. To the extent that any content is construed as investment research, you must note and accept that the 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 under relevant laws.

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

Saxo Bank (Schweiz) AG
Beethovenstrasse 33
CH-8002
Zurich
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.