FX Trading focus: USD rally tripped up post-payrolls, but US long yields deserve most attention.
The US dollar rally was tripped up after the October US jobs report, one that showed much better than expected payrolls growth (+531k vs. 450k expected for the October number, but especially the +235k revision to the prior two months’ data. But the participation rate remaining steady at its September level, and October average hourly earnings only meeting expectations (of 0.4% MoM and +4.9% YoY) due to a 0.1-hour drop in the average weekly hours. It looks as if vaccine mandates may not survive a court battle, which could help improve the reabsorption of workers into the jobs market in coming months. Regardless – all of the above leaves the impression of a solid US jobs report, if one that didn’t shoot the lights out or threaten to raise the Fed’s blood pressure on wage-price spiral concerns.
In reaction to the report, besides the modest USD reversal back lower after a rally attempt, the most notable market move, and one that deserves far more attention, was the very sharp rally in US treasury market on at the long end of the curve. This sent the US 10-year yield benchmark back below 1.50% and the 30-year to new local lows south of 2.00%. This was far too large a move to have been a reaction to the surprises in the US jobs data and is a bit of a conundrum. Is this just some follow-on trauma after fixed income traders at the short end of the yield curve were apparently badly shaken by the recent repricing of the forward central bank expectations nearly everywhere? Or is this the market pricing poor prospects for longer term growth and no sustained inflation? Not entirely sure, but we’ll watch the follow-on action this week, especially in the wake of the US 10-year auction tomorrow and 30-year T-bond auction on Wednesday.
The USD pair most sensitive to long US treasury yields has historically been USDJPY, which is in our spotlight at the start of the week after the very steep rally in long treasuries on Friday in the wake of what nominally looked like a solid US jobs report. After rallying to just north of the key 114.50 area in October, a tight range has settled with the three-week low at 113.26 – a figure the pair could be set to challenge if US long yields continue to drop, which would challenge the inflation theme. Still, a proper reversal of the rally from the September base would require a move down through 112.00 and arguably 111.25.