FX Update: Weak US treasuries after weak US jobs report merit most focus

Forex 3 minutes to read
John Hardy

Head of FX Strategy

Summary:  The US change in nonfarm payrolls showed about half as much growth as expected, echoing the ADP number this week. This has triggered minor volatility in the US dollar, but the more interesting development is that US treasuries sold off again despite the weak data. This keeps the focus firmly on US treasury yields going into next week as a potential disruptor of the market narrative across assets, including in FX.


Today’s FX Trading focus:

A brief note on US jobs report and the US dollar
The US nonfarm payrolls change came in far weaker than expected at a mere +245k versus +460k consensus expectations, and thus the worst rate of growth in payrolls for the cycle since the pandemic outbreak. The unemployment rate dropped 0.2% to a new local low of 6.7% as expected, but that was on a simultaneous drop of the participation rate by 0.2% to 61.5%, pretty much a wash (and the 2% lower participation rate relative to pre-pandemic suggests real rate, including people likely not working at full speed, is closer to 10% or worse). Anecdotally, as I pointed out on this morning’s Saxo Market Call podcast, data from Homebase, an employee scheduling company with more than 100k small businesses enrolled, suggested hours work dropped and businesses began closing starting in late October, showing the first decline since March. The caveat there is that small business is not all business and other employers that have been big winners from Covid-19, like Amazon, are hiring in droves. Still, the data was not positive.

The volatility was not particularly noteworthy in the wake of the report in FX, with some minor USD strength in evidence before weakness came back in. But the more interesting development for all markets was the fresh weakness in treasuries despite the weak data, which is taking the 10-year treasury yield back toward the key highs since the pandemic outbreak – around 1.00% for that  10-year benchmark and 1.75% for the 30-year. US yields have been sufficiently rangebound for months to not act as a major input into the market narrative across asset classes, but it is our firm belief that this could change on any notable range break for the long end of the yield curve in US treasuries. Would this quickly trigger a value-momentum shift in equities in favour of the former, would it serve as a general risk-off driver akin to the. Or… is it USD negative on the assumption that the Fed will simply not allow yields to rise much higher before capping them with yield curve control, or even USD positive if the Fed sits on its hands a bit and US treasuries crowd out other financial assets?

I don’t have the answer to these questions, but a break higher in yields could prove a gamechanger for asset market volatility, which has recently ebbed in equities, and only picked up slightly in FX on the break down in the US dollar. Going into next week, keep at least one eye on the US treasury market and how markets behave if volatility picks up further there, and then how Fed officials react in various appearances, but especially during the December 16 FOMC meeting.

Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Saxo Markets
Most of our staff in Singapore are working from home to help limit the spread of the coronavirus. We remain at your service on the details below. Thank you for your understanding.

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.