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Article / 02 May 2014 at 6:42 GMT

FX remains catatonic ahead of US employment report

Head of FX Strategy / Saxo Bank
• Moribund market trapped between inertia and low volatility
• Major surprise needed to shock us into new ranges
• Not necessarily the employment report that's holding us back

It’s May-Day indeed for trend and volatility traders, as trading ranges and directional moves remain in scarce supply. Witness yesterday’s GBPUSD attempt to break higher that was promptly reversed later in the day and the lack of follow through in EURUSD after the impressive bullish reversal bar Wednesday. 

Some might say that the market is holding its breath for the US employment report, but if we look back at USDJPY — which should be one of the more sensitive pairs to US data — over the last several months, the November and December payrolls surprises triggered fairly large responses, but the January, February and March reactions were muted at best and it’s hard to see how the market will see today’s number impacting the prospects for moving the supposed iron-clad certainty of the Fed’s policy trajectory unless we get a 250,000-plus or perhaps even a 300,000-plus non-farm payrolls read today (or on the flip-side, a sub-100,000 reading). The market, according to the Bloomberg consensus, is looking for 215,000-plus today for the April jobs report.

Bloomberg’s Mark Gilbert has a short, but compelling piece on how central bank intervention is the ultimate cause of the low volatility as:
 “…central banks pump billions of dollars, euros, yen and pounds into the global economy, they are smothering the information content that market prices are supposed to deliver, and destroying the two-way market between buyers and sellers. Now, not only do traders know the value of nothing (as always), they also know the correct price of very little.”

Japan saw a huge boost in household spending in March, but this was obviously demand brought forward by the impending April 1 VAT hike.

The Bank of England’s Cunliffe was out late yesterday arguing that rising property prices are the worst risk to the UK’s financial stability. The question is whether the BoE tries to attack this issue from a “macro-prudential” angle or considers bringing forward the anticipation of hiking the policy rate, which it would prefer not to, all other factors being equal. Such a move in this environment would likely pressure the exchange rate higher. The front end of the curve has been moribund over the last 7-8 trading days after rates rose after the most recent jobs report released on April 16th.  There was considerable noise in the press yesterday on the increasing popularity of "zero hour contracts" , which are situations where workers are employed, but not guaranteed a minimum number of hours or pay per week. This may be skewing the overall UK employment data.

Another potential, if unlikely, source of market activity today could be the Eurozone PMI readings for the April, as we add Spain and Italy’s latest readings to the mix as well as seeing the final readings for France, Germany, and the Eurozone as a whole after the initial readings showed slight improvement in Germany, disappointing weakening in France. In the meantime, we ponder whether any technical indicator, like Wednesday’s bullish reversal, is worth anything ahead of a key event risk, and more importantly, at a time when the market refuses to go anywhere. Let's see 1.3900+ or 1.3775 fall on a close-of-day basis before we raise our hopes that anything is about to happen.

Source: Saxo Bank

Stay careful (or should I say “awake”?) out there.

Economic Data Highlights
Japan Mar. Jobless Rate out unchanged at 3.6% as expected
Japan Mar. Overall Household Spending out at +7.2% YoY vs. +2.0% expected and -2.5% in Feb.
Australia Mar. HIA New Home Sales rose +0.2% MoM
Australia Q1 PPI rose +0.9% QoQ and +2.5% YoY vs. +0.6%/+2.2% expected, respectively and vs. +1.9% YoY in Q4

Upcoming Economic Calendar Highlights (all times GMT)
Norway Apr. Manufacturing PMI (0700)
Spain Apr. Markit Manufacturing Survey (0715)
Switzerland Apr. Manufacturing PMI (0730)
Italy Apr. Markit/AACI Manufacturing PMI (0745)
France Apr. Final Markit Manufacturing PMI (0750)
Germany Apr. Final Markit/BME Manufacturing PMI (0755)
Euro Zone Apr. Final Markit Euro Zone Manufacturing PMI (0800)
UK Apr. Markit Construction PMI (0830)
Euro Zone Mar. Unemployment Rate (0900)
US Apr. Change in Nonfarm Payrolls (1230)
US Apr. Unemployment Rate (1230)
US Apr. Average Hourly Earnings and Average Weekly Hours (1230)
US Mar. Factory Orders (1400)
Chain Apr. Non-manufacturing PMI (Sat 0100)
Australia Apr. AiG Performance of Services Index (Sun 2330)
Australia Mar. Building Approvals (Mon 0130)
China Apr. Final HSBC China Manufacturing PMI (0145)


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