The FX Trader: Weak US jobs report enough to sustain USD bears?

The June US jobs report was very “meh” – could kick that FOMC hike over the horizon if it ever happens this year. Every month I complain about the quality of the US labor market data and will continue to do so, but we know the market reacts to it just as it did yesterday. I certainly hope that new Fed Chair Warsh’s task forces help the US come up with some better month-to-month if not real time measures of the status of the US labor market. That said, yesterday’s June report was pretty soft. The June nonfarm payrolls growth was a miss, and the revisions of the prior two months payrolls (far more likely to be more accurate) were a negative 74k, putting the average of the last three months at a ho-hum +111k – not strong, not weak. The Household Survey was somewhat more interesting, showing a drop in the unemployment rate to 4.2% vs. expectations for the rate to hold steady at 4.3%, but this was only achieved through a huge 0.3% drop in the Participation Rate in June to 61.5%. That rate is falling off a cliff, hitting new post-pandemic lows if you erase the chaotic pandemic months of 2020. This fall is too fast to be from demographics (the last boomers leaving the work force on early retirement) and suggests some weak demand for labor.

Bottom line: Takeaways from this job report are difficult. We’ve all grown to distrust the NFP change data in recent years and now we have the combination of a less transparent Fed Chair and one that also distrusts the data – how do we draw conclusions? This soft report merely took the steam out of anticipation for Fed tightening and was a squeeze on the strong building of long USD positions in the wake of the FOMC meeting two weeks ago. The data almost certainly takes a July FOMC hike off the table but doesn’t materially change things until we see more data - and remember, with a less transparent Fed, the markets themselves (risk sentiment, long treasuries) are also an indicator. The long-end treasury yield sticking higher after this data point are one “interesting” development to track and a bit troublesome for the USD bears here. EURUSD needs a rally above 1.1500 for fuller signs of a reversal.

Interesting timing on that USDJPY intervention. Japan’s Ministry of Finance appears to have intervened yesterday, selling USDJPY after it had peaked on Tuesday at above 162.80 and therefore solidly above that old post-1980’s high of 161.95 from 2024. This came after a long period of relative silence compared to the drumbeat of intervention threats back in April. It was interesting that the MoF appeared to front-run risks of a USDJPY spike higher after the US jobs report by intervening well ahead of the report, a possible “shot across the bow” approach. Luckily for the MoF, the US jobs report was USD-bearish. But the sustained pressure on long JGB’s (10- and 20-year JGB yields are back near their multi-decade highs) and the rebound in US treasury yields are not helpful for JPY bulls, if such a species exists. A broad market attitude shift on the USD – or firm coordinated official action by both Japan and the US – is needed for USDJPY to finally sell off in sustained fashion.

Bottom line: Watching price action on any further USDJPY selling and whether it looks intervention-driven or more “organic”. If we merely back up toward the highs like the last time around, it suggests that the yen remains at risk of steady further broad depreciation. Technically, for USDJPY we would need a move and hold below not only 160.00 but 158.00, likely in the context of a broader USD sell-off, to suggest that

Sterling broke higher. In my last update, I focused on sterling’s “structural upside potential”, connecting it to the potential for an Andy Burnham-led political revolution and the opportunity for some commonsense policies to boost the UK economy. It’s too early to know where Burnham is headed as he’ll need to win that leadership election first in the weeks ahead before we start to get signals on his policy focus from his cabinet picks. Besides the key EURGBP, I also brought up GBPCHF as a potential sterling cross of interesting, but this one has shown less momentum on reflexive Swiss franc buying perhaps connected with weaker EUR (soft CPI release) and gold rebound.

Bottom line: So far this move is tantalizing only, with the EURGBP breakdown below 0.8600 in part driven by the soft EU flash CPI print for June. For sterling to properly trend higher, the market can only build its case for more sterling strength later this month when Burnham as confirmed new Labour leader begins making those cabinet picks and forming policy – which brings risk in either direction depending on the signals those picks send.

Chart focus: USDJPY.

USDJPY first sold off yesterday on signs of Japan’s Ministry of Finance selling, but was kept lower by the soft US jobs report. It’s helpful technically for bears that the local price action suggests a rejection of the new highs, but for a more profound rejection, we need to work down through the 160-158 zone. The first solid Ichimoku technical framework indicators of a more profound bearish reversal would only come with a penetration of the shaded cloud area by the price candles and the lagging span (thick green line) likewise cutting through the price candles. Note that the last time around when the MoF intervened and USDJPY sold off sharply, the lagging span turned bearish, but the daily candles refused to close below the cloud. On the weekly chart, the same Ichimoku indicators never came close to triggering a bearish setup – it’s useful to look at both time frames for perspective. Also note that at present, the lower edge of the cloud lines up closely with the 61.8% retracement of the rally – a doubly important area in the low 158.00 area. The last sell-off also saw dip-buying in the 61.8% retracement of the time.