FX Update: You say want a USD resolution?
Head of FX Strategy, Saxo Bank Group
Summary: The US dollar has broken higher in places ahead of today’s August US jobs report, but key USD pairs remain rangebound ahead of today’s report, with US treasury yields applying the pressure for a broadening break higher in the greenback if they continue higher today. USDJPY is the high-beta trade to US yield direction, given that it has already ripped above 140.00 ahead of today’s US data.
FX Trading focus: Looking for USD resolution
Yesterday’s strong US data saw an interesting reaction in the US treasury market, as the long end of the yield curve rose far more than the short end. The August ISM Manufacturing survey and its internals perhaps provide a microcosm of the reasons for this: a somewhat stronger headline reading of 52.8, with New Orders rising into expansion at 51.3 and the Employment component rising smartly to 54.2, while Prices Paid eased sharply to a new 2-year low at 52.5. In short: data is solid, keeping the Fed on the currently expected pace of further tightening as taming inflation readings don’t require a re-upping of anticipation, while the longer end rises on the possibility that the US economy may have more legs than was previously anticipated. The other interesting data point yesterday was a new 9-week low in the initial jobless claims, at 232k, and a -6k revision to the prior week’s data point. This improvement in the best high-frequency measure of the US labor market suggests at least that the market isn’t deteriorating over the last couple of months.
In reaction to the fresh sharp rise in longer US treasury yields, USDJPY jumped to new highs for the cycle and followed through well clear of 140.00, a 24-year high. If today’s US jobs data takes long yields sharply higher still, look out below for the Japanese yen. It will take extraordinary further pressure for the BoJ to consider a policy pivot. As for the MoF wagging its finger in disapproval at the market, please….
Now, on where to focus over today’s mix of US labor market data points, I would watch three things.
Nonfarm payrolls: a miss relative to expectations of approximately +300k may not be as impactful as one might think, given that something in the 100-200k range, for example, could simply be read as some mean reversion from the very strong +528k July number and especially now that we have some more offsetting data on the strong side (weekly claims, recent JOLTS survey suggesting near record openings, even if was for July, etc.). Badly sub 100k may be needed with ugly data from the household survey to sustain a negative USD reaction.
Unemployment Rate: More important than the unemployment rate itself is whether the Household Survey used to calculate the rate is strong or weak. The headline from the household survey changes suggests that the labor market has stagnated since March. Any big surprises here are worth noting. The official unemployment rate dropping to 3.5% in July to match the modern record low, by the way, only came as a result of the participation rate dropping to new local lows, down some 0.3% from the March peak, while the overall labor force has also shrunk this year from the peak. What gives? I really don’t know, but there may some demographic drivers of a lower participation rate for a few more years – rising cohort of aging boomers leaving the work force (highest rate of live births in 20th century was late 1950’s to early 1960’s). Working against that is a smaller upcoming Gen Z.
Average Hourly Earnings: we have seen some very strong rises in the Atlanta Fed’s median wages survey, which has surged in almost vertical fashion from mid-last year, rising above 4% YoY in September and posting the highest levels in the approximately 25-year history of the survey at 6.7% in June and July. The Average Hourly Earnings survey has been so volatile due to the pandemic stimulus, which has settled in 5-5.50% range this year and generally dipping from the 5.6% peak earlier this year. This survey has gone so quiet that a notable surprise (that doesn’t come from a shift in the weekly hours worked average used in its calculation) might raise eyebrows – not holding my breath.
Today sees us entering the 11th consecutive day of the EURUSD trading between 0.9900 and 1.0100 – surely it’s time for a resolution? For trend followers, that would be to the downside, with 0.9500 the next likely target if we do resolve lower. Some suspense over the weekend for the euro as we wait for whether Putin restarts flows through the Nord Stream 1 pipeline tomorrow. Remember that the US has a three-day weekend ahead (Labor Day).
Table: FX Board of G10 and CNH trend evolution and strength.
JPY weakening picking up a bit here and could get aggravated on a further rise in US treasury yields. On that note, interesting to see whether the CNH gets pulled in the yen’s direction next week. Elsewhere, the status of the Euro resurgence will be tested next week by developments in the energy market and the Thursday ECB meeting.
Table: FX Board Trend Scoreboard for individual pairs.
The USD has followed through higher versus the struggling GBP and now JPY, but we still await resolution in USDCAD, AUDUSD and EURUSD, as noted above.
Upcoming Economic Calendar Highlights
- 1230 – US Aug. Nonfarm Payrolls Change
- 1230 – US Aug. Average Hourly Earnings
- 1230 – US Aug. Unemployment Rate
- 1400 – US Jul. Factory Orders
Latest Market Insights
Quarterly Outlook Q3 2022: The Runaway Train
- Central banks' attempts to kill inflation is a paradigm shift, which could end in a deep recession.
Tangible assets and profitable growth are the winnersWith US equities officially in a bear market, the big question is where and when is the bottom in the current drawdown?
Understanding the lack of investment appetite among oil majorsThe everything rally seen in recent quarters has become more uneven, as its strength is driven by commodities in short supply.
The pressure is on as the wind leaves the sailsWith cryptocurrencies in sharp decline, are we entering a crypto winter or is the bear market a healthy clean-up of the crypto space?
Why the Fed can never catch up and what turns the US dollar lower?Many other central banks are set to eventually outpace the Fed in hiking rates, taking their real interest rates to levels higher than the Fed will achieve.
Bank of Japan: Swimming against the tideThe Japanese economy has gone from the age of deflation to rapidly rising prices in no time, leaving the Bank of Japan in a pickle.
Green transformation detour and bear market hibernationWith the impending risk of global econonomic derailment, we share the five things investors need to consider in this new half year.
Crisis redux for the eurozone?Whether there's going to be a recession in Europe or not, the path towards a stable economy will be agonizing.
Technical Outlook: Gold, Oil and a remarkable multi-decade perspective on EquitiesThe Nasdaq bubble pattern, USDJPY resistance, crude oil uptrend losing steam and the technical outlook for USD.
China: the train of new development paradigm left the station two years agoChina is transiting to a new development paradigm, as they are hit by deteriorating terms of trade, a slower global economy and an uncertain future while continuing attempts to contain the pandemic.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)