There has been an uptick in intraday volatility since yesterday’s better-than-expected U.S. employment report. However, the depth and breadth of these market moves have been held in check, mostly on the back of the holiday-shortened Independence Day weekend stateside. Nonetheless, the overall general sentiment remains: the world’s go-to currency of choice, the mighty dollar, is expected to be in demand by many. Especially with the Riksbank, Norges Bank, European Central Bank (ECB), Bank of Japan, Swiss National Bank and Reserve Bank of Australia all fighting for a weaker currency, the USD has nowhere to go but higher. The dollar bulls have been given a new lease on life and are feeling that the market is preparing itself for a sustainable trend higher for the USD.
Nonfarm Payrolls Report Surprises
June’s nonfarm payrolls (NFP) report was much stronger-than-expected. With both the NFP and ADP’s June National Employment Report figures (+288K versus +212K expectations) crushing expectations, unemployment has dropped to +6.1% in the U.S. Even the revisions impressed; April’s NFP was revised up to +304K from 282K, and in a very favorable sign, the June labor force participation rate remained steady at +62.8%, although that figure is the lowest it has been for 36 years. The headline print has many dealers already revising down the possibility of the Federal Reserve’s first rate hike — several now see a risk of rate hikes in the third quarter of 2015, rather than the fourth quarter, or the first quarter of 2016.
Like in most bullish reports, there is always a crumb thrown to the bears, and yesterday it was the part-time worker. The number of part-time workers for “economic reasons” rose +275K to +7.5M. This group is sometimes known as involuntary part-time workers, and though down over the year, the data shows “no clear trend in recent months.” They are part-time because there are no full-time jobs or their hours have been pulled back — the quality of jobs has to be a concern. The high level of part-time jobs in the U.S. will surely be one indicator of “slack” that Fed Chief Janet Yellen can refer to for keeping American interest rates lower-for-longer.
Will the Fed Stay the Course?
It’s only natural that a stronger jobs report would stoke investors’ and dealers’ fears about the Fed’s exit from quantitative easing, or QE. With no access to cheap money, how much of a correction will the market see in the S&P 500? It’s a fine line between an improving economy and one that’s not yet strong enough to fend off a Fed exit. Sustainable economic traction is paramount, and a Fed that’s too quick to tighten the taps could undo all the good far quicker than acquiring it. There will be a time when investors and dealers need to separate the U.S. economy from asset prices, but to base it on one data point is not enough to move the needle for the Fed. This is true for the bond market. U.S. 10’s backed up 4-5bps to +4.64%. It’s difficult to have a bigger selloff in U.S. Treasurys with so many major banks willing to keep rates low as spreads squeeze the currency’s value.
The ECB Does Nil
The ECB decision was a big non-event yesterday, with rates left unchanged and little new news shared during the post-decision press conference. President Mario Draghi said that interest rates were at their lower bound, making monetary policy less effective. He also announced that the ECB would shift to a six-week meeting schedule and begin publishing meeting minutes, effective in January 2015. With no bone thrown, the market had to wait and rely on U.S. jobs numbers to provide an incentive to move market prices. On a brighter note for the forex market, the release of U.S. data would suggest that a divergence in monetary policy looks set to widen considerably over the coming 12 months.
The 18-member single currency has been sold on Draghi’s dovish stance and on yield differentials. For many, being short EURs looks healthy. Reaction to yesterday’s NFP was minimal, but it does not detract from a strong report (a holiday long weekend does not help volume and volatility). With Draghi explaining the ECB’s credit plans in more detail, it is pressuring some long EUR positions to further unwind the longs that were accumulated earlier in the week on the push toward €1.3700. The current lack of speculative bets on the EUR’s fall will only add to the sustainability of its decline. With the lack of volatility and volume comes a higher sense of neutral positions, and there has not been a good enough incentive to do otherwise. With Treasury-bund spreads now hitting new heights, (+43bp this year) it should favor the dollar even more.
The EUR has now broken below its 20-DMA at €1.3602 and has fallen to a fresh low (€1.3587). It looks like the EUR may have peaked last Monday (€1.3701). Momentum is slowly pushing the single unit to revisit its recent €1.3503 low. If momentum can be sustained, €1.3480 opens up a host of opportunities.
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