Article / 08 July 2016 at 7:46 GMT

FX Update: The bar is high for a positive US jobs report surprise

Head of FX Strategy / Saxo Bank
  • Japan may be in for big blast of stimulus
  • NFP headline number could be in the +200k region 
  • Dallas murders will likely boost Trump's campaign
 An advisory role in Japan? Perhaps. Photo: iStock

By John J Hardy

Former Fed chair Ben Bernanke will be in Japan next week to “discuss Brexit and the BoJ’s negative interest rate policy with Abe and Kuroda”, according to a Reuters article. Could there be any clearer sign that Japan’s officialdom is gearing up for some new shock and awe programme at a future meeting? Don’t expect any interesting headlines from the visit, but one has to imagine that Bernanke’s tour will include a glance at the Bank of Japan's/Abe’s plans for a coming helicopter money programme and a possibly advisory role on said plan. 

The May US jobs report was the last nail in the coffin for positive expectations for Fed rate hikes after expectations peaked last December around the first and only FOMC rate hike for the cycle. Now we have a number of US indicators turning a bit stronger – especially the June ISM non-manufacturing survey – while the market that is reluctant to nod its head at this improvement and price any implications for Fed policy. So today, do we get a sufficiently strong US jobs report to jar the market from its complacency? And what is “sufficiently strong”? My suspicion is that the bar is fairly high on payrolls (well over +200k) but a bit lower for average hourly earnings (even matching the +2.7% expected would represent a new high since 2009.

The assassination-style murder of five Dallas policeman will inevitably raise the temperature of the US presidential election campaigns, likely pushing sentiment in favour of Trump, even as he seems to be doing everything humanly possible to self-destruct recently. The Republican convention gets underway a week from Monday.

USDJPY continues to push back lower toward the symbolic 100.00 level, despite relatively positive US data so far this week. It will be interesting if the US employment report today proves sufficiently strong to test the JPY bulls’ mettle, while a weak US jobs report will likely lead to a test below 100 and quickly raise the question of where intervention appears. Technically, the 95.00 area is an interesting one, as 94.65 represents the 61.8% retracement of the entire 2012 low to 2015 high rally.
 Source: SaxoTraderGO

The G-10 rundown

USD – judging from the tepid reaction to data so far this week, the bar appears fairly high for the US jobs report surprising sufficiently on the upside to trigger a significant reaction in interest rate expectations, while the downside surprise potential is perhaps somewhat easier. We expect in-line to stronger data and prefer a relatively broad USD rally.

EUR – Italian banks are the burning question mark at the moment, but there seems to be little energy in EURUSD at the moment – is the market too distracted with JPY crosses and sterling and ignoring risks to the euro?

JPY – Former Fed Chairman Bernanke is heading to Japan to speak with government and BoJ officials – we all know where this is headed, with the chief question one of timing and size. In the meantime, actual FX intervention risks pick up with every tick toward the 100.00 level in USDJPY.

GBP – Sterling pushed back into the lower range as sellers were quick to emerge in GBPUSD when the pair crossed above 1.3000.

CHF – sight deposit growth over the Brexit vote experience looked orderly, so not much of a safe haven bid in evidence – may correlate loosely with JPY crosses. USDCHF is a candidate for a strong rally on US data sufficiently strong to shift Fed rate expectations again.

AUD – AUDUSD remains in neutral territory as the market sorts through the US data today and the market maintains a strong positive interest rate spread between Australia and the US of around 120 basis points for two-year swaps. Dovish Reserve Bank of Australia expectations and risk off are the key potential drivers for AUDUSD lower, while no change to the Fed outlook and a further rebound in risk appetite are the drivers for bulls.

CAD – not entirely sure what yesterday’s sell-off in USDCAD was about after solid US data and an indifferent (51.7 vs. 51.2 expected) Canadian June Ivey PMI. Alas, a 6% selloff in crude oil later in the day saw CAD crumbling back to 1.30+. We continue to like this pair higher, with today’s US and Canadian June jobs numbers.

NZD – thriving at the expense of the AUD at the moment, but valuation looking unbearably stretched in broad terms. The next important catalyst either way will be Reserve Bank of New Zealand guidance or the July 18 Q2 CPI release.

SEK – Sweden’s CPI release next Tuesday the next focus as EURSEK has pulled into the higher reaches of the long standing range toward 9.60/70.

NOK – An ugly crude oil selloff yesterday puts pressure on NOK, and further pressure on energy prices will likely see the pair pulling into the higher range above 9.45.

Upcoming Economic Calendar Highlights (all times GMT)

  • UK May Visible Trade Balance (0830) 
  • Canada Jun. Unemployment Rate/Employment Change (1230) 
  • US Jun. Change in Nonfarm Payrolls (1230) 
  • US Jun. Unemployment Rate (1230) 
  • US Jun. Average Hourly Earnings and Average Weekly Hours (1230) 

– Edited by Clare MacCarthy


John J Hardy is head of FX strategy at Saxo Bank


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