Strong US jobs data offers most interesting market test

The free-fall in US yields actually stopped on Monday and hasn’t progressed since – a pause that feels like the market is holding its breath after such a vicious move. US treasuries could be at risk of some consolidation if US data doesn’t play ball with the market’s recent dramatic adjustment of Fed expectations.

Either way, weak data today still offers a test of whether the market can take expectations even lower just as particularly strong data (especially on earnings) could trigger a steep reversal in the recent price action. In FX, USDJPY is clearly the proxy for US yields (I tweeted an intraday chart showing the tightness of the USDJPY-Treasury correlation) as discussed in the chart below.

The European Central Bank meeting and press conference was a test for euro pairs, with the euro ending the day higher despite Mario Draghi’s every attempt to retain dovish credibility with his promise during the Q&A that the ECB has the “headroom” and mandate to do QE. At the margin, the fact that the ECB didn’t cut rates and priced the TLTRO-III at slightly above the deposit rate (still as low as -0.3%) was seen as not the maximum dovish option. I largely agree with John Authers, who argues that Draghi has lost his ability to sway the market and that the market is looking beyond the end of his tenure for what is coming next.

With the ECB largely at the end of its mandate, despite Draghi’s protestations, it will be up to the EU Commission and European Council to expand that mandate or at least announce a large fiscal stimulus that would offer the ECB something more worth buying if QE is to have any impact (this would be a de facto MMT) 

USDZAR has arched above 15.00 on recent weak growth numbers and concerns that the South African Reserve Bank risks losing its independence if it is required by the government to help bail out state-owned companies – especially Eskom, the heavily indebted electric utility. 

Next week’s calendar highlights include whether tariffs against Mexico go into effect on Monday or negotiations today will delay these for now. The US May CPI print is up on Wednesday and May Retail Sales on Friday.  Turkey announces rates next Thursday, the Swiss National Bank meets  the same day and Russia’s central bank meets on Friday.

Trading interest

Short AUDUSD as long as below 0.7025 and NZDUSD as long as below 0.6700. 
Short EURUSD via put options – 1-2 months near 1.1200 strikes.
Traders looking to trade the US jobs report can consider USDJPY calls or puts near the money for sub-1 week expiry.

Chart: USDJPY

USDJPY has paused here below 109.00, just as the drop in US yields has paused since reaching the lows on Monday. Today’s US jobs data and the whether it sparks a further move in US yields will be the key coincident indicator for USDJPY, which risks a squeeze of short-term shorts if yields rise and the price action is taken back up through that 109.00 area.