The FX Trader: Tepid reaction to soft US jobs data. US CPI up next.

The latest

A soft US July non-farm payrolls report Friday confirmed other weak numbers, but the Household Survey confused as the US unemployment rate dropped. Friday’s payrolls numbers were ugly indeed, as we got a -23k drop in payrolls versus +80k expected and the net revision of the prior two months of data was worse still at -107k. This largely confirmed the soft ADP number from earlier in the week and the suddenly sub-50 July ISM Services Employment Index. But the Household Survey used to compile the unemployment rate confused slightly, as the rate dropped to 4.1% versus the expectation for an unchanged reading of 4.2%. But that was partially explained by another 0.1% drop in the participation rate, which has been plummeting this year, though a significant chunk of the decline was due to a one-off statistical methodology adjustment. Evidence suggests that most of the drop-off is due to less labor force participation among 55+ workers, so the old “discouraged workers” explanation doesn’t really hold It is likely mostly due, therefore, to bulge of boomers in the demographic profile that are leaving the workforce Still, it is remarkable that, if we ignore the pandemic-impacted 2020-21 calendar years, we now have the lowest total labor force participation rate since the 1970’s, which is the decade that saw the largest acceleration in women entering the labor market.

Bottom line (s): The recent US dollar move lower was mostly driven by the coordinated intervention in the Japanese yen. This Friday jobs report didn’t meaningfully change the relative yield spreads between the US and global peers, so there is little for currency traders to go on here until we get more significant data surprises (Wednesday’s US CPI release is the most important next data point) or more forceful policy moves from the BoJ and Takaichi government, in the case of Japan (see below).

The JPY doesn’t want to stay up. Friday showed us that the JPY is a very tough currency to strengthen, as discussed in the look at the EURJPY chart below. One would have thought that Friday’s weak US jobs data was just what the doctor ordered to get the JPY higher, and yet the punch lower in USDJPY to below 157.00 after the data release was completely backfilled and here we are today with USDJPY and other JPY crosses near or at local highs. I am still constructive on the Japanese yen, but it could continue to prove tough to turn higher if global yields and risk sentiment don’t turn more consistently lower as well. The US CPI data Wednesday is the next test for JPY crosses and could drive even more JPY weakness in the very short term if it comes in hot.

Chart focus: EURJPY.
Treasury Secretary Bessent’s notice that the US had sold Euros versus the Japanese yen rather than selling USDJPY caught European counterparts by surprise. The US move to sell EURJPY rather than USDJPY was largely symbolic and served two purposes. First, it was a signal that the US is willing to back up Japan’s efforts to strengthen its currency, as coordinated intervention is read by the market as far more impressive than Japan going it alone. Second, the US wanted to avoid suggesting anything about the broader US dollar level (and importantly, therefore, not wanting to spook global holders of US treasuries to lower their exposures to said treasuries or alter their plans to continue buying them in the future.) And yet here we are with EURJPY backing up above 183.00. For the Ichimoku-based picture here, the local resistance might be the cloud area as well as the lagging span line (green) hitting the old price bars, but recent action has shown little respect for cloud levels, so there is very little precision here – but bears need for the 183.00-185.00 zone to provide resistance at some point.