A global bonds selloff has pushed yields up across the board towards post-Brexit highs while the anti-establishment wave sweeping the western world could force a 'No' vote on the Italian referendum in December.
Article / 06 June 2016 at 7:51 GMT

FX Update: USD may quickly calm after Friday’s US payrolls debacle

Head of FX Strategy / Saxo Bank
  • Payrolls shock may be fully priced in the market by now
  • Back to slightly better than 50/50 odds of Fed hike in 2016 
  • Central bank meetings in Australia and New Zealand this week
 The greenback was hammered by the jobs data but should recover soon. Pic: iStock

By John J Hardy

The Fed has an acute case of egg-on-the-face after Friday’s US jobs report disaster, which saw net negative payroll growth for the month of May if we include the revisions to the prior two months (-59k for March plus April vs. the +38k for May.) And even if we add back in the 35,000 Verizon workers who were out on strike in the month, it still makes for a dour report, with even the 4.7% unemployment rate headline (a huge -0.3% drop) spoiled by the drop in the participation rate. (note that the broader U6 underemployment indicator has only dropped -0.1%, to 9.7%, from its level in October of last year). 

Still, while the reaction in the currency market has been swift and brutal and deservedly so, given the Fed’s ill-timed recent attempt to massage expectations for Fed hike potential considerably higher, the news may be largely priced into the market now. The market, after all, only moved to price in about half of the potential rate hikes for this year that the Fed argued it was capable of bringing. And further out the curve, the market remained entirely unconvinced that the US economy would give the Fed cause to continue its hiking cycle. In other words, we’re back to slightly better than 50/50 odds that the Fed hikes before 2017 and with virtually nil priced in further out the curve. 

As usual, after the key US data releases of the first of the month, it’s a long wait for the next batches of data that offer a guide on the trajectory of the US economy. So as we wait this week and next, we watch for how quickly this move in USD weakening fades, if it fades, and against which currencies. Our premise going into the data was that good news would be good and bad news bad. Eventually, therefore, we would expect that risky assets and currencies would underperform, even if that has not at all been the case since Friday, as EM currencies and markets have rallied smartly (initial focus on easing of Fed rate hike risks to liquidity rather than implications for global growth if US economy slowing?) .

With two central bank meetings up this week in Australia and New Zealand likely to underline the prospects for a lower policy rate, particularly in New Zealand, these may be among the currencies to most quickly peak and reverse against the US dollar. Likewise for Canada, as ugly current account imbalances persist and unfavourable developments south of the border should be seen as a headwind for the satellite Canadian economy. Canadian rates at the front end of the curve have largely mimicked the trajectory of US rates over the last few weeks.

Elsewhere, yet another UK poll showed a strong Leave vote and we have sterling in rapid retreat once again, making it more interesting at these levels to trade an eventual sterling relief rally (long options for expiry well after June 23 referendum only as spot likely too volatile), especially versus the euro, in the event that either the UK votes to stay or that a UK vote to leave is eventually seen as less catastrophic than the market fears.


EURUSD snapped brutally back higher in line with the whiplash reversal in Fed rate expectations and we’re left wondering if there is enough of a shift in sentiment to engineer a fresh attempt above the 1.1500 level. With the UK referendum looming, it’s arguable that considerable risk capital is sidelined for now and keeps EURUSD within the range. The next points higher, if EURUSD does continue the rally this week, are the 61.8% Fibo around 1.1420 and then the final, 76.4% Fibonacci up near 1.1500.
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The G10 rundown

USD – absorbed a huge blow on Friday that was justified, but it appears that most of the adjustment potential, in interest rate terms, is in the bag, so after a “hot money” washout, things may go quiet soon.

EUR – strong, but only on US data woes and Brexit noise as the single currency has little to recommend it. Watching the 1.1500 level as the key for keeping EURUSD expectations lower for the medium and longer term.

JPY – the main beneficiary on Friday’s ugly US jobs numbers, but we all know that a stronger JPY quickly points to sabre rattling from the Bank of Japan and Abe government. Watching the 105.50 area lows in USDJPY.

GBP – waylaid by the latest poll, underlining once again how treacherous it will remain to trade sterling pairs until the other side of the referendum. Current levels making it more interesting to speculate on speculate on either/both sides of the Brexit/Bremain vote on June 23.

CHF – no apparent theme to extract from the recent market action in EURCHF, and USDCHF longs are licking their wounds after the reversal back below 0.9800.

AUD – no rate cut likely from Australia and the apparent stability in China and some commodity prices giving AUD some support, but would expect further strength against the USD to fade soon, even on neutral message from the Reserve Bank of Australia meeting tonight.

CAD – May have little further upside potential against the US dollar on a rate spread basis, at least, as Canada’s economic fate seen linked to the US unless commodities/energy can put on a show.

NZD – The Reserve Bank of New Zealand meeting this week has analysts divided on the prospects for a cut, meaning two-way reaction potential. Would expect mean reversion lower for the overachieving kiwi soon.

SEK – EURSEK more likely to push lower on positive risk appetite. Perhaps some unwillingness for traders to commit here and elsewhere in intra-Europe trades as Brexit vote looms.

NOK – market entirely lacking conviction as oil price also appears frozen at $50/barrel.

Upcoming Economic Calendar Highlights

  • US Fed Chair Yellen to Speak at event (1630) 

– Edited by Clare MacCarthy


John J Hardy is head of FX strategy at Saxo Bank


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