FX Update: You say want a USD resolution?

FX Trading focus: Looking for USD resolution

Yesterday’s strong US data saw an interesting reaction in the US treasury market, as the long end of the yield curve rose far more than the short end. The August ISM Manufacturing survey and its internals perhaps provide a microcosm of the reasons for this: a somewhat stronger headline reading of 52.8, with New Orders rising into expansion at 51.3 and the Employment component rising smartly to 54.2, while Prices Paid eased sharply to a new 2-year low at 52.5. In short: data is solid, keeping the Fed on the currently expected pace of further tightening as taming inflation readings don’t require a re-upping of anticipation, while the longer end rises on the possibility that the US economy may have more legs than was previously anticipated. The other interesting data point yesterday was a new 9-week low in the initial jobless claims, at 232k, and a -6k revision to the prior week’s data point. This improvement in the best high-frequency measure of the US labor market suggests at least that the market isn’t deteriorating over the last couple of months.

In reaction to the fresh sharp rise in longer US treasury yields, USDJPY jumped to new highs for the cycle and followed through well clear of 140.00, a 24-year high. If today’s US jobs data takes long yields sharply higher still, look out below for the Japanese yen. It will take extraordinary further pressure for the BoJ to consider a policy pivot. As for the MoF wagging its finger in disapproval at the market, please….

Now, on where to focus over today’s mix of US labor market data points, I would watch three things.

Nonfarm payrolls: a miss relative to expectations of approximately +300k may not be as impactful as one might think, given that something in the 100-200k range, for example, could simply be read as some mean reversion from the very strong +528k July number and especially now that we have some more offsetting data on the strong side (weekly claims, recent JOLTS survey suggesting near record openings, even if was for July, etc.). Badly sub 100k may be needed with ugly data from the household survey to sustain a negative USD reaction.

Unemployment Rate: More important than the unemployment rate itself is whether the Household Survey used to calculate the rate is strong or weak. The headline from the household survey changes suggests that the labor market has stagnated since March. Any big surprises here are worth noting. The official unemployment rate dropping to 3.5% in July to match the modern record low, by the way, only came as a result of the participation rate dropping to new local lows, down some 0.3% from the March peak, while the overall labor force has also shrunk this year from the peak. What gives? I really don’t know, but there may some demographic drivers of a lower participation rate for a few more years – rising cohort of aging boomers leaving the work force (highest rate of live births in 20^th century was late 1950’s to early 1960’s). Working against that is a smaller upcoming Gen Z.

Average Hourly Earnings: we have seen some very strong rises in the Atlanta Fed’s median wages survey, which has surged in almost vertical fashion from mid-last year, rising above 4% YoY in September and posting the highest levels in the approximately 25-year history of the survey at 6.7% in June and July. The Average Hourly Earnings survey has been so volatile due to the pandemic stimulus, which has settled in 5-5.50% range this year and generally dipping from the 5.6% peak earlier this year. This survey has gone so quiet that a notable surprise (that doesn’t come from a shift in the weekly hours worked average used in its calculation) might raise eyebrows – not holding my breath.

Chart: EURUSD
Today sees us entering the 11^th consecutive day of the EURUSD trading between 0.9900 and 1.0100 – surely it’s time for a resolution? For trend followers, that would be to the downside, with 0.9500 the next likely target if we do resolve lower. Some suspense over the weekend for the euro as we wait for whether Putin restarts flows through the Nord Stream 1 pipeline tomorrow. Remember that the US has a three-day weekend ahead (Labor Day).