Article / 06 October 2016 at 7:43 GMT

FX Update: Strong NFP could see USD rally for real

Head of FX Strategy / Saxo Bank
  • Very strong ISM non-manufacturing survey boosts dollar
  • Upside NFP surprise could put November hike back on table
  • Commodity pairs a key signal for broadening USD strength

Nonfarm payrolls
Back to work: yesterday's September ISM non-manufacturing numbers came in strong and a corresponding show of strength Friday could see the USD surge yet higher. Photo: iStock

By John J Hardy

The huge, surprise meltdown in the US August ISM non-manufacturing survey to 51.4 from the July reading of 55.5 was an ugly suggestion that the key US services sector is faltering, but then necks were whipped back the other way by yesterday’s September reading, which vaulted to a new high for 2016, sending US yields back higher and taking the USD higher as well. 

Now, to seal the deal surrounding the open question of whether November's Federal Open Market Committee meeting is in fact "live", we would need a strong US jobs report tomorrow, particularly on the average hourly earnings side if payrolls are indifferent (as they were with the ADP survey yesterday). 


We are watching the USD/commodity currency pairs for signs that the USD strength will broaden more convincingly. For these pairs, the rise in US yields and global liquidity implications faces off with the reflation theme that seems to be driving some resilience to the USD rally in commodity currencies. 

For this pair, a swing through the key Fibo’s, especially the 61.8% of the local rally just below 0.7550, begins to suggest a breakdown.


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Source: Saxo Bank 

The G-10 rundown

USD – the market is moving more aggressively to price in higher rate hike odds for both the November and December FOMC meetings, though we’re still at under 24% for November and around 62% for December. A strong jobs report tomorrow should see the December odds bumped significantly higher, and more importantly, the US longer yields pulling higher as well – note that the US 10-year yield is within a couple of basis points of 1.75% – a round yield level, near the previous high from early September and near the 200-day moving average to boot.

EUR – the euro is still hanging in there against the USD and having found upside against the pound as well on the “hard Brexit” story and prime minister Theresa May’s hard line. EURGBP one of the favourites to turn first if the GBP weakness eases.

JPY – a critical break in USDJPY yesterday through the Ichimoku cloud ; we are watching whether this trigger is a false one or leads to the establishing of a new range toward 105.00-107.50, which is our base case provided the US jobs report continues to drive the USD and US yields higher tomorrow.

GBP – am interesting mention of monetary policy in May’s speech yesterday as well as stable UK service PMI data helping the pound to rally yesterday – have the sterling shorts over-reached? Another GBP-supportive development is the weakening JPY, as the GBPJPY short trend has been one for the ages for most of the year and could drive significant position unwinding on a rally. On that note, broadly speaking there is certainly plenty of fuel from a speculative positioning perspective in EURGBP and GBPUSD as well for a train-wreck of a sterling short squeeze in the near-term if one develops.

CHF – plenty of volatility in both EURCHF and USDCHF as we hoped that strong US yields would provide a more significant pressure on CHF to the downside. Watching the 0.9800-plus resistance in USDCHF with interest and whether EURCHF can manage to pull above the 1.1000 level again.

AUD – as we discuss above, AUD at the centre of the struggle between the headwinds to the “Reach for yield” trade from higher US rates while there is a bit of a reflation trade afoot at the same time. Further downside in AUDUSD from here below perhaps 0.7500 begins to suggest that the USD will maintain the upper hand. As well, the private debt bubble in Australia is getting more and more press.

CAD – positive US data could rub off on CAD in the crosses, thinking of NZDCAD and AUDCAD in particular, even if USDCAD risks a break higher if 1.3250-plus comes into play again. Key relative data comparisons for Canada and the US through tomorrow’s Canada employment and Ivey PMI data.

NZD – same comments as for AUD, with NZD perhaps more pressure by the rise in yields as it benefitted most from the reach for yield theme for much of this year.

SEK – the krona is a negative yielder languishing above 9.60 in EURSEK but not finding additional weakness above there after the break. A Riksbank signal a la this week’s ECB taper talk could see SEK putting up a fight at some point.

NOK – consolidating after its remarkable run higher – oil a critical focus as NOK perhaps more or less fair value now unless energy prices head higher still and drive a global reflation theme. For EURNOK, the key resistance is 9.00 and then the break level around 9.15.

Upcoming Economic Calendar Highlights (all times GMT)

  • 1130 – ECB Minutes 
  • 1230 – Canada Aug. Building Permits 
  • 1230 – US Weekly Initial Jobless Claims 
  • 1315 – Euro Zone ECB’s Praet to Speak 

— Edited by Michael McKenna

John J Hardy is head of FX strategy at Saxo Bank


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