Head of FX Strategy
Summary: As the more hawkish than expected FOMC minutes from Wednesday have failed to trigger any widespread deleveraging outside of the most speculative corners of asset markets, the US dollar has failed to add to the gains inspired by the kneejerk reaction to the minutes and the marking higher of Fed expectations for policy hikes this year (as well as long yields also lifting). Today, we look at how the market will treat what should be a strong nonfarm payrolls change number and the latest earnings data.
FX Trading focus: USD shrugging off hawkish Fed after kneejerk, Hot EU inflation
The hawkish FOMC minutes from Wednesday have so far proven not hawkish enough to trigger more than the one-off adjustment in the US dollar that seems to be fading quickly as we look toward today’s US December jobs report (more on that below). At the same time, risk sentiment remains broadly stable, speculative- and highly interest rate-sensitive US equities generally aside. This is intriguing as the implication is that as long as US yields and Fed expectations are able to march higher without spooking asset markets, the US dollar may fail to rally and could even weaken, though we need to get EURUSD up out of the sub-1.1400 range for a more interesting signal on that front.
Additionally, for the cycle we have to wonder if the Fed is the cart or the horse here, something that it may itself not understand, as it has already shared its lack of understanding on how its balance sheet affects the economy (though we seem to have a good idea how it affects financial markets – and the standing repo facility of some $1.5 trillion offers the Fed quite a large safety valve for how tapering and possibly a quick move to reducing the balance sheet will affect treasury market and asset market dynamics). Put another way, the economy will pull the Fed this way or that on interest rates more than Fed policy will impact the data, as policy moves only hit with a significant lag of 9-12 months.
Speaking of data, the next step for the USD and market is the December jobs report later today, with the market likely leaning now for quite a strong figure, given the six-month high ADP December private payrolls change number released on Wednesday at +807k. That puts the two-month total for the Nov-Dec ADP private payrolls change at over 1.3 million, while the official BLS nonfarm payrolls change total was a tepid +210k in November. Today’s December tally is expected to show about +450k of payrolls growths. But note: the “two-month net revision” number bears watching, as the US Bureau of Labor Statistics has had difficulty collecting data over the last year and has consistently underestimated the pace of jobs growth, with every month since July seeing growing positive revisions, from a +119k revision in August to a +235k revision in November.
As well, the Average Hourly Earnings data deserves watching, with the market looking for +0.4% month-on-month growth and a sharp drop to +4.2% year-on-year due to the basing effect of a significant surge in December 2020. The official unemployment rate is based on an entirely different “household survey” and its plunge to 4.2% in November from 4.6% in October, together with a labor force participation rate that has not normalized to pre-pandemic levels, tells its own story of labor market tightness. Analysts suggest that the generous benefits and spectacular portfolio gains since the pandemic outbreak have taken millions of older workers near retirement out of the work force, never to come back. In the pre-pandemic cycle, it took a full two years for the unemployment rate to drop from 5.0% to 4.2%, a feat that was accomplished in three months last year.
Elsewhere, we have the latest hot EU inflation numbers (Germany surprising with rise to 5.3% CPI year-on-year in December vs. 5.1% expected and 5.2% in November and the EU estimate today out at 5.0% vs. 4.8% expected and 4.9% previous). which are piling on the pressure for the ECB to eventually cave. ECB governing council member Kazaks was out Wednesday claiming the ECB was ready to signal policy tightening if the inflation outlook rises, even hinting at an early 2023 rate hike. That would have carried about ten times the impact had it been Lagarde or Chief Economist Lane.
Chart: EURGBP
Sterling has worked its way stronger over the last three weeks against the euro and the US dollar, perhaps on its hands-off approach on the spread of the omicron variant relative to the responses elsewhere, particularly in mainland Europe, where gatherings and activity have been severely limited in many countries. Still, EU-UK yield spreads at the front of the curve have not shifted notably over the last three weeks in sterling’s favour, so some of the additional pop here to start the year on sterling may have to do with investors allocating more capital the UK’s way. The EURGBP pair has traded below the prior cycle low near 0.8380, leaving only the major range support back since the Brexit vote of late 2016 near 0.8275 as the next focus.
Table: FX Board of G10 and CNH trend evolution and strength
Still waiting for a pulse from the US dollar in either direction – perhaps we get one today in the wake of the US jobs data? If the US dollar does weaken and risk appetite remains strong, the G10 smalls are ready for a bounce-back. Note the CHF showing signs of rolling over as well in momentum terms at least – need EURCHF above 1.0500 for more interest there.
Table: FX Board Trend Scoreboard for individual pairs.
USDCAD has maintained the downtrend after a test this week as oil prices have kept CAD firm and there could be some policy catchup in the wings from the Bank of Canada, but a weaker US dollar still required for traction there. The USDCHF move back to positive is not interesting in the context of the rangebound chart there. Watching CNH crosses broadly as China may be set for more forceful policy easing signals.
Upcoming Economic Calendar Highlights (all times GMT)
Bond. Long Bond(s)
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Althea Spinozzi,
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Charu Chanana,
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Peter Garnry,
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With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
