Quarterly Outlook
Q3 Investor Outlook: Beyond American shores – why diversification is your strongest ally
Jacob Falkencrone
Global Head of Investment Strategy
USD smashed as we are flying blind on US payrolls data
John J. Hardy
Global Head of Macro Strategy
Summary: The outlook turned stagflationary Friday on the ugly revisions to recent US jobs data, making it clear we can’t trust the most recent data and spooking the market and sending the US dollar tumbling. USDJPY in the spotlight after a spectacular reversal Friday.
A reality check on US jobs data – are we flying blind on the US labor market?
The July US jobs report triggered a nasty slide in the US dollar. It wasn’t the small miss on the headline payrolls growth number (73k versus the 100k+ expected), but the -258k revision of the prior two months of data that spooked the market. Sure, it has been clear for some time that the US labor market data is poor due to the difficulties inherent in the BLS’s “birth and death” (of businesses and therefore of imputed payrolls) and because response rates to the BLS surveys has declined badly since the pandemic, to around 40% from 60% or more previously. And yes, revisions have been consistently negative for the last two years, but these tended to come with a significant delay. The rapid and very large downward revision for the May and June data suggests that were are all flying blind on the payrolls data and can’t trust what we are seeing month to month, with revised data carrying more weight than the most recent data, which is of the poorest quality.
The market reaction to the weak US data was swift and brutal: an ugly sell-off in the greenback and a spectacular reversal in the USDJPY, just a day after it had squeezed through all meaningful local resistance and the psychological 150.00 levelb (more below in USDJPY chart discussion). The Fed is now marked nearly certain to cut rates in September from sub 40% probability before the Friday’s jobs report and the benchmark two-year US treasury yield collapsed nearly 30 basis points in one of the largest moves in years, only exceeded twice since the regional bank crisis in early 2023. The JPY was the largest mover on the “ideal” (for JPY) combination of risk off and the collapse in yields. EURUSD also reversed, rallying hard into the key area above 1.1550 that would need overcoming to suggest the local lows are in.
Elsewhere, I remarked on Friday with some surprise that the Trump administration’s 39% tariff on Switzerland hadn’t really impacted the Swiss franc, but that changed later on Friday and today as CHF sold off, also on a low headline CPI reading (-0.2% MoM, though note the +0.8% YoY core reading versus 0.6% expected and 0.6% prior). But do note the July PMI services for Switzerland out this morning at 41.8 vs. 48.5 in June – yikes! That is the lowest since the pandemic outbreak.
Chart: USDJPY
An epic reversal in USDJPY just after it has crossed into the new range above 149.50 and the psychologically important 150.00 level. This puts a firm cap on the action for now unless we can reverse either the dip in global bond yields or the risk-off tone in markets or both. The 146-145 zone is the next important one to traverse for a test of the gigantic 142-140 structural area, with 148.00 as tactical resistance after today’s action.
Looking ahead – a quieter week for Macro, BoE in focus.
The week ahead for the US is particularly quiet aside from tomorrow’s July US ISM Services survey. US Treasury auctions tomorrow through Thursday (3-,10-and 30-years) will be interesting for a status check on demand for US paper after this big move in yields. The lone central bank highlight this week is the Bank of England, which is expected to cut rates on Thursday despite resurgent inflation. Sterling may stay shaky here, particularly when markets are in risk-off mode, with GBPJPY downside a specific focus together with the usual EURGBP upside if we can sustain above the 0.8700 level there.
FX Board of G10 and CNH trend evolution and strength.
Note: If unfamiliar with the FX board, please see a video tutorial for understanding and using the FX Board.
An earthquake in the momentum so far as the USD rally reverses and the JPY sell-off does likewise – but do these blossom into new trends, the following days will tell us.
Table: NEW FX Board Trend Scoreboard for individual pairs.
GBPJPY is set to become the first JY pair among the major JPY pairs to slip into a downtrend if we close near current levels around 196.00 today. Elsewhere, note that the EURUSD “downtrend” is in uncertain territory as the pair trades at important local resistance.
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The instrument(s) referenced in this content may be issued by a partner, from whom Saxo receives promotional fees, payment or retrocessions. While Saxo may receive compensation from these partnerships, all content is created with the aim of providing clients with valuable information and options..
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