Daily FX Market Roundup 01.07.16
China’s shortest trading day turned into a long session of pain for currencies and equities. There’s been no let up in the selling this week with the U.S. dollar and Japanese Yen climbing to fresh highs against the British pound, Japanese Yen, Swiss Franc, Canadian, Australian and New Zealand dollars. At this stage Non-Farm Payrolls need to rise by 300K or more to turn sentiment around and unfortunately economists are only calling for a weaker number. However anything short of 300K may just lead to a dead cat bounce in USD/JPY, risk currencies and equities because expectations for a Fed March rate hike has been hit by the volatility in the financial markets. Before New Years, the market was pricing in 52% chance of tightening in the first quarter but those expectations have now fallen to 39%.
Investors shouldn’t expect non-farm payrolls to save the market. While it is the most important piece of U.S. data on the calendar and the center point of Fed policy, economists are looking for a relatively benign number. The chance of job growth exceeding 300K is extremely slim. Some of the other indicators for the labor market shown below point to a good reading but even if payrolls beat by 50K, it won’t be enough to change the market’s minds about the odds of further Fed tightening in this type of market environment. It probably won’t change the Fed’s minds either because there are 2 more NFP reports before the March meeting. For us, average hourly earnings will be the main focus of the labor market report. If wages rise then there’s some hope but if they slow, then expect equities and USD/JPY will bleed more losses.
Arguments for Improvement in Non-Farm Payrolls
1. Rise in Employment Component of ISM Non-Manufacturing
2. ADP Employment Change Rises to 5 Year High
3. Sharp Rise Consumer Confidence Index
4. Continuing Claims decline slightly
5. Challenger Job Cuts Fall by 27.6%
Arguments for Deterioration in Non-Farm Payrolls
1. 4 Week Average Jobless Claims Rises to 275K from 270K
2. Drop in Employment Component of Manufacturing
3. Small Drop University of Michigan Index
