FX Update: EURUSD teetering at pivotal levels ahead of US jobs data

Iran surprised me and many market participants with quick retaliatory strikes overnight against US airbases in Iraq. The attacks seemed designed to showcase that  Iran can hit a target with its missiles but also to show that it wasn’t interested in loss of life of US military personnel as the US side claimed no fatalities. Iran positioned the attacks as having “concluded proportionate measures”, suggesting that there is little risk of immediate escalation as long as the US side does not respond in kind. It will be important to see the response in the  US morning today from the Trump administration. The longer term risk of asymmetric warfare from the Iranian side is an important factor, but I still judge the immediate prospects of an escalation overt kinetic conflicts to be low, given the US overwhelming capabilities. The market action overnight bore that out, as most major assets returned to levels trading just before the attacks. An odd coincidence or accident or unlikely, something more sinister also spooked markets as a passenger airline headed for Ukraine went down in Tehran around  the time of the attacks.

Elsewhere, the US dollar continue to press higher – erasing the overnight dip in USDJPY and pushing most determinedly higher against the Euro this morning as that pair traded near local lows this morning – perhaps the weakness down to ugly German Factory Orders, a topic we discuss extensively in this morning’s Market Call as Germany perhaps struggles with a permanent change of the landscape in the automotive industry. On the US side of the pair, yesterday’s December ISM Non-manufacturing suggested no immediate cause for concern in the dominant services sector of the US economy.

If markets are watching US macro data to drive the USD outlook, the employment data is critical for whether the Fed is happy to sit on its hands from here (market consensus) or will be forced into another round of cuts on weaker jobs data. On that front, the two major data series, the official nonfarm payrolls change and the ADP private payrolls change numbers have never been as divergent as they are currently in the recent history of the two data series and were only this divergent as the global financial crisis was unfolding, when the NFP series was slower to register the degree of job market weakness than the ADP series – note chart below. One of the series is wrong – which one? (By the way, the official private payrolls doesn’t meaningfully diverge from the basic nonfarm payrolls series, so the 2020 US census hiring is not the likely driver as it may have been in the spring 2010)

Chart: US NFP payrolls change vs. ADP private payrolls change
The NFP change data series is far stronger than the ADP payrolls change series – suggesting that one of the data series is wrong – if we are in a weakening economic environment in the US,  as was the case in early 2008, the ADP was the leader in detecting the severity of the decline. Not enough observations for statistical relevance, but the gap will mean revert eventually. The ADP payrolls change for December released later today expected to rebound strongly from the weak +67k in November and print above +150k.