Article / 03 June 2016 at 7:22 GMT

FX Update: Dollar volatility likely on key NFP release

Head of FX Strategy / Saxo Bank
  • US jobs report could see significant reactiobn in EURUSD
  • 'Market may have gotten all it can' out of USDJPY downside
  • GBP at the lower end of recent range on Brexit uncertainty

By John J Hardy

This month’s US employment report seems a bit more capable of generating significant volatility relative to prior reports as the Federal Reserve has clearly managed market expectations for a summer rate hike significantly higher since the last report. 

Given that shift higher in rate expectations, we might expect that ugly downside surprises may have more potential to move the market in the immediate aftermath of today’s report, though a significant upside surprise – particularly if both earnings growth and payrolls surprise significantly – could still spark considerable additional enthusiasm for USD longs. 

US employment
Any signs of a slowdown in the US employment scene today will likely be seized on by traders looking to second-guess the Fed and its ability to hike rates. Photo: iStock 

As we have noted in recent reports, it seems as if the market has absorbed the Fed’s hawkishness relatively well after an initial wobble in risky assets, leading to the notion that good news is good news and bad news is bad. That means the reaction function in the USD could be one in which strong data today favours USD upside versus euro, yen and possibly CHF while commodity and EM currencies see a more muted response than what one might have expected in the recent past. 

Perhaps the best data for the “risk-on” across markets would be data that are merely in-line to slightly better than expected as it keeps the Fed on a gradual rate hike path.

Do note that we also have the US ISM non-manufacturing survey up 90 minutes after today’s employment report. The private Markit Services PMI survey showed a fresh dip to 51.2 in the initial May survey reading and publishes its result 15 minutes prior to the ISM. 

Later, the Fed’s Brainard (Federal Open Market Committee voter and on the Board of Governors) delivering what appears to be a general economic outlook and monetary policy speech today and could garner further attention depending on the quality of US data today. 

Recall the late volatility in USD pairs last around last Friday’s comments from chair Janet Yellen.


The reaction to a strong US jobs report could be felt quite strongly in EURUSD on the carry implications as yesterday’s European Central Bank underlined the long time horizon of the ECB’s QE programme and low rates regime. 

The next major trigger is the 1.1100 area to the downside, both the approximate recent low and 200-day moving average. But volatility has been fading fast in EURUSD and there is some risk of a lull in trading ranges even if we do manage a break to new lows until we get to the other side of the Brexit vote as the latter is clearly a massive psychological macro hurdle.


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Source: Saxo Bank 

The G-10 rundown

USD – Clear focus on the data today, as Fed expectations have gone sideways for two weeks awaiting today’s data, which is the major tip-off into the June 15 FOMC meeting.

EUR – ECB was a non-event as expected, perhaps slightly dovish given the strong Q1 performance in Europe, and the euro is expected to trade in negative correlation with risk appetite, with the Brexit issue looming as a major uncertainty (on the idea that the initial reaction around a Brexit is in sterling, but generates considerable longer-term uncertainty for the single currency).

JPY – The market may have gotten all it can out of the USDJPY to the downside for now if we get . The latest pressure on JPY crosses stems from Abe’s comment that any fiscal stimulus may have to wait until the fall (with stimulus seen as necessarily linked to fresh BoJ moves), when the market was

GBP – At the weaker end of the tactical range here amidst the uncertainty around the referendum vote. Signals from data and polls are entirely unsatisfactory until we see the writing on the wall after June 23.

CHF – EURCHF possibly trading at the lower end of the range on the recent re-aggravation of Brexit worries. Strong US data could reinvigorate interest in USDCHF upside and a challenge of parity.

AUD – The Reserve Bank of Australia meeting up next week represents the next hurdle, with no cut seen as likely after the fairly finely balanced decision the last time around. AUD dragging a bit on very weak key industrial commodity prices and tepid Chinese data.

CAD – Oil remains stubborn in refusing to correct, perhaps muting the upside potential in USDCAD, though we would still look for a resolution higher on strong US jobs numbers later today.

NZD – The kiwi is enjoying the resurgence in risk appetite and overachieving again, possibly making for a bit more mischief to the upside into next week’s RBNZ meeting, which may cap the rally as the RBNZ is likely to cut.

SEK – Looks fairly priced here, with perhaps mild downside pressure in EURSEK on positive risk sentiment.

NOK – Oil looking remarkably stubborn near the 50 dollar/bbl area and an extension of the rally in an environment of a risk-positive response to US data today could see EURNOK pushing down toward support.

Upcoming Economic Calendar Highlights (all times GMT)

  • Norway May Unemployment Rate (0800) 
  • Euro Zone May Final Services PMI (0800) 
  • UK May Services PMI (0830) 
  • Canada Apr. International Merchandise Trade (1230) 
  • US May Change in Nonfarm Payrolls (1230) 
  • US May Unemployment Rate, Average Hourly Earnings (1230) 
  • US May ISM Non-manufacturing Survey (1400) 
  • US Fed’s Brainard (voter) to speak (1630) 

— Edited by Michael McKenna

John J Hardy is head of FX strategy at Saxo Bank


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