Yields on short-term US Treasury debt have fallen to the lowest in history on mounting expectations of extra stimulus from the Federal Reserve. USD/JPY has been doing nothing but tracking yields which means that until yields bottom, USD/JPY will remain under pressure. I’ve been talking about this for weeks now – here’s an updated chart. If you want to forecast where USD/JPY is headed, just watch how yields respond to payrolls
So My Favorite EUR/GBP Setup was a complete dud – but you win some and you lose some .
Here are some recent sound bites from articles that I have written on Non-farm Payrolls, Greece and Beyond
If Non-Farm Payrolls Was Strong, Why Did the Unemployment Rate Rise?
We saw an erratic reaction in the forex market on the heels of NFPs because the report contained both good news and bad news. On the bright side, more Americans have found work and census hires only contributed a small portion to the payroll gains. Of the 290k jobs created last month, 231k were in the private sector which is needed for sustainable recovery in the labor market. Hiring was particularly aggressive in the business services, leisure and hospitality industries. The 44k rise in manufacturing payrolls was also the strongest since August 1998. At the same time, Americans are working slightly longer hours with the weekly hours index rising to 34.1 from 34.0. However wage growth has slowed while the expansion in the labor market boosted the unemployment rate.
Amidst the confusion, the key takeaway is that the April non-farm payrolls report was healthier than anticipated and reflects underlying strength in the U.S. economy. The expansion in the labor market is not necessarily bad because it means Americans are restarting their job searches which reflects optimism and not pessimism. In order for the recovery to be sustainable, the massive population of jobless Americans need to return to the work force. With this in mind, we believe that the dollar should recover its gains against the Japanese Yen.
The upper and lower houses of the German Parliament have already approved aid for Greece and it now goes to the office of the German President who will sign it into law today. Although this may not be a long term solution, it should be enough to boost risk appetite and sustain the relief rally in the EUR/USD.
To the market’s disappointment, the European Central Bank failed to announce new policy measures yesterday. Everyone was hoping that the ECB would resume its long term funding facilities or more dramatically, buy government bonds. Unfortunately not only did they fail to do so, but Trichet said the ECB did not even discuss the option which either suggests that they do not think the Greece situation is as severe as the market believes (which we do not think is the case) or they want to wait to see how the market reacts to the German vote before throwing out the rulebook. Trichet also repeatedly said “Greece will not default” which implies that the ECB will stand behind Greece and resort to a nuclear option of purchasing government bonds and act as the buyer of last resort before allowing Greece to fail. Most likely, they want to give it a last ditch effort and see if a successful vote by German lawmakers in favor or aid to Greece will be enough to permanently bring down Greek bond spreads and pacify investor concerns. The hope is that the prospect of removing Greece out of the debt markets for a few years will remove them from the headlines.
I am extremely bullish Canadian dollars following the hot employment report. A total of 108.7k Canadians found new work in the month of April, driving the unemployment rate from 8.2 to 8.1 percent. Not only was this the fourth consecutive month of positive job growth but also the strongest job growth ever. The labor market in Canada has improved significantly in recent months and combined with the recent sell-off in loonie, there is a good chance that the Bank of Canada will raise interest rates in June. This would make them the second most aggressive G20 central bank – which will be extremely positive for the loonie. As a result, I think USD/CAD will trade down to at least 1.0260 and possible even 1.0150 (it is currently at 1.04.
The dollar surged after the non-farm payrolls report because job growth excluding census workers was very strong.
With the absence of U.S. equity traders, we did not see the risk rally that tends to occur near the U.S. equity market open. Based upon how the dollar traded after the NFP report in April 2007, there is good chance that the current trend in the dollar will last. Volatility should settle by the London close and the move that we see today should continue on Monday.
The following chart shows how the EUR/USD performed on April 6, 2007 and how the move continued the following Monday. For a chart on how the EUR/USD traded on NFP day on April 6, 2007, read my prior NFP post.
Yhe first question that comes to mind is how the Good Friday holiday could affect volatility in the currency market. Holidays usually mean less liquidity and less volatility but when there is a piece of economic data scheduled for release as important as non-farm payrolls, less liquidity could mean greater volatility. The last time that non-farm payrolls was released on Good Friday was in 2007. At the time, the market was looking for payrolls to rise by 130k but it rose by 180k, beating the market’s expectations by 50k. The following 5 minute chart of the EUR/USD shows how the currency pair traded in the hours after the release. We can see that the dollar jumped approximately 50 pips immediately after the announcement, consolidated for the first hour, then pushed slightly lower the hour after that and then consolidated for the rest of the day. Typically we see a “V” shaped price action after the payrolls report which we have written about month after month. The reason why there tends to be a V shaped price action in the EUR/USD is because the forex markets respond one way to the NFP report and equity markets respond another. However this month the U.S. equity markets are closed which means that the initial reaction in the EUR/USD should last and volatility should settle 2 to 3 hours after the NFP release.