Is the Goldilocks trade back on? While longer-term global growth and macro trends argue otherwise, a dovish FOMC and a dip in 10-year US yields has sentiment on the rise in the short term.
Article / 05 October 2012 at 13:23 GMT

US unemployment rate gaps to 7.8%. Let the USD head games begin.

Head of FX Strategy / Saxo Bank

US payrolls were in line with expectations, but the unemployment rate dropped sharply. The news is difficult to interpret, and the market reaction so far is inconsistent across asset classes.

The nonfarm and private payrolls numbers were more or less in line with expectations at a subdued +114k and 104k respectively, thus approximately tracking population growth and no better, but the unemployment rate dropped a massive -0.3% to 7.8% rather than rising to 8.2% and the lowest rate registered since January of 2009. The explanation for the number was found in the household survey, which registered a stunning increase of 873k . One can either believe that the US job market is improving a bit more than some of the numbers show or that there are more than a few Obama fans in the BLS department responsible for these reports, or both. 

There is something profoundly perverse about the USD weakening in a knee-jerk reaction off these employment numbers – particularly against the Euro. I cannot come up with any reason that EURUSD should rise from here other than residual Euro squeezing and the stale belief that the US is the best funding currency for carry trades because Fed will ease more for longer (Gold meanwhile is correcting lower at the moment as this eases the prospect of QE – where is the consistency?). Let’s see where we stand at the end of the day and perhaps Monday. Alternatively, the market could be thinking that this low unemployment rate number gives Obama bragging rights and there is the general belief that a new Obama presidency is less USD positive and might lead to a more bitter confrontation over the fiscal cliff. But if that was the case, then why should equities be higher? Again – there’s no consistency in the reaction pattern and I am suspicious of this first move off the back of the employment data.

EUR crosses
Before the US numbers today, EURUSD, EURJPY and EURGBP had all executed nearly perfect 0.618 retracements of their recent sell-waves (1.3032, 102.25 and 0.8041, respectively), an important resistance/swing level for whether the Euro outperformance will fade from here. I think EURGBP and EURUSD are the most important of these resistance levels. If they fall on today’s close (if the close is well above these levels, it makes a full test of recent EUR- cross highs more likely.

The Bank of Japan meeting came and went with no new developments and despite expectations building that the BoJ was ready to keep up the easing momentum. Growth projections were lowered and it is interesting to note, as our Asia strategist Andrew Robinson did, that Japanese car sales fell massively due to the recent confrontation over the small islands Japan bought. I have long held that the key to the JPY crosses lies in interest rates, but another aspect must eventually be the relative economic prospects for the US vs. Japan and they have been heading the right way for the former relative to the later. I have long been forecasting USDJPY higher, but it has only stabilized rather than cooperating with my view. That may be changing in the weeks ahead. Today’s unemployment rate drop certainly is a stimulus for USDJPY higher, especially if the market can get over its USD selling elsewhere.

Chart: USDJPY 
Looking at the longer term chart, we can see that USDJPY has lost momentum. With interest rates about as low as they can go and Japanese terms of trade worsening while their currency has strengthened while US terms of trade have been improving while their currency weakens, it would seem at some point that we eventually look for some sort of rally in USDJPY. It has been a long wait indeed. The lack of downside momentum does point to some exhaustion of the old bear trend, but it would be good to see a real move higher before believing that the lows are in and that we can look for a sustainable uptrend to begin developing in the months ahead. On that note, I would look for a break of the 40-week moving average, for the MACD to turn positive, and then a break of the big neckline-like area much higher (waaaay up at 83.70-ish) to be taken out as well. So it will take some doing to turn the battleship completely. If we edge back below 77.50 from here, it will take even longer…


Canada Employment Report
The Canadian employment report was very positive and saw USDCAD sharply lower – but there are extremely long CAD positions on lately and the recent USDCAD rally softened up the downtrend a bit so I would expect the momentum to fade very rapidly at current levels (0.9740) down to 0.9700.

Economic Data Highlights

  • Switzerland Sep. Foreign Currency Reserves out at CHF 429.3B vs. 418.4B in Aug.
  • Norway Aug. Industrial Product Manufacturing out at +0.9% MoM and +5.6% YoY vs. +7.6% YoY in Jul.
  • Germany Aug. Factory Orders out at -1.3% MoM vs. -4.8% YoY vs. -0.5%/-4.3% expected, respectively and vs. -4.6% YoY in Jul.
  • Canada Sep. Unemployment Rate out at 7.4% vs. 7.3% expected and 7.3% in Aug.
  • Canada Sep. Net Change in Employment out at +52.1k vs. +10k expected and +34.3k in Aug.
  • US Sep. Change in Nonfarm Payrolls out at +114k vs. +115k expected and +142k in Aug.
  • US Sep. Change in Private Payrolls out at +104k vs. +130k expected and +97k in Aug.
  • US Sep. Unemployment Rate out at 7.8% vs. 8.2% expected and 8.1% in Aug.
  • US Sep. Average Hourly Earnings out at +0.3% MoM and +1.8% YoY vs. +0.2%/+1.8% expected, respectively and vs. +1.7% YoY in Aug.
  • US Sep. Average Weekly Hours out at 34.5 vs. 34.4 expected and 34.4 in Aug.
  • Canada Aug. Building Permits rose +7.9% MoM vs. -1.3% expected

Upcoming Economic Calendar Highlights (all times GMT)

  • US Aug. Consumer Credit (1900)
  • Australia RBA’s Stevens to Speak (Sun 2300)
  • China Sep. HSBC Services PMI (Mon 0230)
Umbeluzi Umbeluzi
I suspect unemployment rate is a bit misleading, bcz don't account for people yet out of statistics. Am I wrong?
Andrew Ho Andrew Ho
Numbers may have been 'massaged' to desired level for various reasons. Statisticians argues that numbers are never wrong, but they are hardly ever right either. I subscribe to the theory of the invisible hand, in this particular case.


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