Head of FX Strategy
Summary: EURUSD trades at pivotal levels after a strong ISM Non-manufacturing survey yesterday and ahead of important US jobs data through the end of this week. The two largest payrolls data series out of the US are giving very different impressions of the rate of payrolls growth. Which one is right?
Iran surprised me and many market participants with quick retaliatory strikes overnight against US airbases in Iraq. The attacks seemed designed to showcase that Iran can hit a target with its missiles but also to show that it wasn’t interested in loss of life of US military personnel as the US side claimed no fatalities. Iran positioned the attacks as having “concluded proportionate measures”, suggesting that there is little risk of immediate escalation as long as the US side does not respond in kind. It will be important to see the response in the US morning today from the Trump administration. The longer term risk of asymmetric warfare from the Iranian side is an important factor, but I still judge the immediate prospects of an escalation overt kinetic conflicts to be low, given the US overwhelming capabilities. The market action overnight bore that out, as most major assets returned to levels trading just before the attacks. An odd coincidence or accident or unlikely, something more sinister also spooked markets as a passenger airline headed for Ukraine went down in Tehran around the time of the attacks.
Elsewhere, the US dollar continue to press higher – erasing the overnight dip in USDJPY and pushing most determinedly higher against the Euro this morning as that pair traded near local lows this morning – perhaps the weakness down to ugly German Factory Orders, a topic we discuss extensively in this morning’s Market Call as Germany perhaps struggles with a permanent change of the landscape in the automotive industry. On the US side of the pair, yesterday’s December ISM Non-manufacturing suggested no immediate cause for concern in the dominant services sector of the US economy.
If markets are watching US macro data to drive the USD outlook, the employment data is critical for whether the Fed is happy to sit on its hands from here (market consensus) or will be forced into another round of cuts on weaker jobs data. On that front, the two major data series, the official nonfarm payrolls change and the ADP private payrolls change numbers have never been as divergent as they are currently in the recent history of the two data series and were only this divergent as the global financial crisis was unfolding, when the NFP series was slower to register the degree of job market weakness than the ADP series – note chart below. One of the series is wrong – which one? (By the way, the official private payrolls doesn’t meaningfully diverge from the basic nonfarm payrolls series, so the 2020 US census hiring is not the likely driver as it may have been in the spring 2010)
Chart: US NFP payrolls change vs. ADP private payrolls change
The NFP change data series is far stronger than the ADP payrolls change series – suggesting that one of the data series is wrong – if we are in a weakening economic environment in the US, as was the case in early 2008, the ADP was the leader in detecting the severity of the decline. Not enough observations for statistical relevance, but the gap will mean revert eventually. The ADP payrolls change for December released later today expected to rebound strongly from the weak +67k in November and print above +150k.
The G-10 rundown
USD – the status of the US dollar is pivotal to watch here with a new calendar year under way as a breakdown in EURUSD and potential break-up well above 1.3000 in USDCAD would begin to weigh against the USD bearish case.
EUR – if the euro is becoming the funding currency of choice, it is not showing up very well in the knee-jerk reactions to events like those overnight, where we saw the usual CHF and JPY suspects strongly preferred. Waiting to judge EURUSD developments after seeing the weekly close this week.
JPY – a geopolitical, risk-off inspired spike overnight that was largely reversed, but interesting to note the strength in the crosses recently – correlates with bond market strength. Negative US data through the end of the week is the chief hope for any JPY bulls in the crosses.
GBP – market awaiting signals from the EU side on UK Prime Minister Boris Johnson’s hopes for a quick free trade deal.
CHF – franc very heavy in EURCHF, with less recovery from the overnight risk-off spike and despite heavy SNB activity (assumed ongoing after evidence of such last week).
AUD – the Aussie has suffered a reversal against the US dollar and in many of the crosses – notable weakness despite strong asset markets and the US-China trade deal struck as markets fear RBA cuts and possible eventual QE
CAD – USDCAD teased above 1.3000 yesterday before the zany oil price spike overnight took the pair back lower – this pivotal level is the battle ground for the pair, together with relative job market strength as both US and Canada report jobs numbers on Friday.
NZD – when does the RBNZ move to complain about NZD strength here – AUDNZD our chief interest in relative strength terms
SEK – the krona relatively stable to stronger on relief from overnight concerns but despite the weak Swedish Retail Sales report for November and the Riksbank minutes saying that the bank won’t raise rates for a very long time.
NOK – overnight showing again that NOK not simply reacting in knee-jerk fashion to oil prices if risk off is simultaneously afoot. Interesting struggle here with 9.85 area and 9.90 area 200-day moving average.
Upcoming Economic Calendar Highlights (all times GMT)
2024: The wasted year
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.
Uncover the shifting focus in 2024's FX markets towards growth resilience and relativity, away from bond yields and inflation stories.
Embrace the metal revolution on the commodity market in the coming year, with a focus on gold, silver, platinum, copper, and aluminum.
The gloominess of geopolitical conflicts and the repetitive nature of political agendas. What else does 2024 hold in store for us?
The disheartening cycle of unresolved geopolitical conflicts, the rise of polarizing political parties, and the stagnation of productivity.
Understand China's political landscape in Q4 2023 and the impact on counter-cyclical initiatives, with a focus on the pivotal Q1 2024.
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.
Uncover the shifting focus in 2024's FX markets towards growth resilience and relativity, away from bond yields and inflation stories.
Embrace the metal revolution on the commodity market in the coming year, with a focus on gold, silver, platinum, copper, and aluminum.
The gloominess of geopolitical conflicts and the repetitive nature of political agendas. What else does 2024 hold in store for us?
The disheartening cycle of unresolved geopolitical conflicts, the rise of polarizing political parties, and the stagnation of productivity.
Understand China's political landscape in Q4 2023 and the impact on counter-cyclical initiatives, with a focus on the pivotal Q1 2024.
