US employment report stuns
John J. Hardy, FX Consultant, Saxo Bank
The nonfarm payrolls fell far short of expectations and the unemployment rate rose again, and this was doubly surprising because of the recent appearance of improving data out of the US. Does the weaker greenback in the wake of this data make sense, however?
USD and US Employment Report
If there is one phenomenon we have been used to for many months now, it is the idea that the USD and risk appetite are irretrievably joined at the hip, with the USD falling every time equities rally and vice versa. We noted yesterday that the strength of this correlation seemed to be fading a bit, since many of the major equity indices were at new highs while the USD was still well off its recent lows. After today’s data, it appears the predominant thought is not of risk appetite, however, but the implications of this poor employment report on the Fed’s quantitative easing plans, which theoretically move back into high gear in the wake of a report like today’s. After all, half of the Fed’s mandate is related to employment (the other half being inflation).
So today’s ugly US employment report has really confused the market here. In normal times, it is bad for the USD to have negative US data – but these aren’t normal times. The question in these times is how the market chooses to react to the negative data in terms of risk appetite (higher because more easing keeps the liquidity party going or lower because the market finally starts to worry about growth implications of bad data?).
After the ugly data today we are seeing risk selling off, which has normally been USD supportive in this market cycle (regardless of the fundamental implications for the US economy). Something is not right here unless we are moving into a new market paradigm: it’s fine and makes sense for USDJPY to drop on today’s market reaction to the US data. It also makes sense or EURUSD to squeeze a bit higher as Euro sovereign risk spreads are easing and this data suddenly makes the US economy look relatively worse. But should AUDUSD to rip higher here? That makes no sense. Risk appetite should be the sole determinant of that pair’s direction and has been nearly tick for tick, seemingly forever. So the current reaction pattern cannot stand – either AUDUSD falls as equities fall or equities shake off the bad data here and rally and in doing so also justify the extension of AUDUSD higher today. (A few minutes after we are writing this, the market is bearing this out as stocks have bounced smartly – there are surely arbitragers and HFT operators looking at these kinds of opportunities.)
USD and US Employment Report
If there is one phenomenon we have been used to for many months now, it is the idea that the USD and risk appetite are irretrievably joined at the hip, with the USD falling every time equities rally and vice versa. We noted yesterday that the strength of this correlation seemed to be fading a bit, since many of the major equity indices were at new highs while the USD was still well off its recent lows. After today’s data, it appears the predominant thought is not of risk appetite, however, but the implications of this poor employment report on the Fed’s quantitative easing plans, which theoretically move back into high gear in the wake of a report like today’s. After all, half of the Fed’s mandate is related to employment (the other half being inflation).
So today’s ugly US employment report has really confused the market here. In normal times, it is bad for the USD to have negative US data – but these aren’t normal times. The question in these times is how the market chooses to react to the negative data in terms of risk appetite (higher because more easing keeps the liquidity party going or lower because the market finally starts to worry about growth implications of bad data?).
After the ugly data today we are seeing risk selling off, which has normally been USD supportive in this market cycle (regardless of the fundamental implications for the US economy). Something is not right here unless we are moving into a new market paradigm: it’s fine and makes sense for USDJPY to drop on today’s market reaction to the US data. It also makes sense or EURUSD to squeeze a bit higher as Euro sovereign risk spreads are easing and this data suddenly makes the US economy look relatively worse. But should AUDUSD to rip higher here? That makes no sense. Risk appetite should be the sole determinant of that pair’s direction and has been nearly tick for tick, seemingly forever. So the current reaction pattern cannot stand – either AUDUSD falls as equities fall or equities shake off the bad data here and rally and in doing so also justify the extension of AUDUSD higher today. (A few minutes after we are writing this, the market is bearing this out as stocks have bounced smartly – there are surely arbitragers and HFT operators looking at these kinds of opportunities.)
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