EUR/USD, USD/JPY: Learning From Past NFP Reactions
eFXnews | Aug 01, 2014 06:36AM ET
Focus of the day:
"In 2014, on US employment report days, the average absolute close to close percentage change in EUR/USD and USD/JPY is 0.21% and 0.33% respectively, versus a regular average day of 0.21% for EUR/USD and 0.27% for USD/JPY. So much for special payroll Fridays!
The intra-day trading patterns, shows that USD/JPY has reversed its 5 minute response directly after payrolls on 3 out of the last 7 releases – which is disconcerting and affirms the data needs to surprise substantially to generate follow-through.
Though weak labor market data would be a bigger ‘pain trade’ shock than strong data, a tendency to average recent payroll numbers means the data has to be very weak to seriously impact long-term policy expectations - after all a 200K NFP in July, leaves the June -July average at a strong 240K/mth.
Broadly as expected data this week, will probably be taken as ‘another bullet dodged’ and favor risk appetite temporarily, but the USD is losing its status as a favored funding currency to the JPY and EUR and this is unlikely to change without significantly softer than expected US numbers. Long Asia EM FX versus the yen is likely to remain a favorite place to express any positive equity related data.
The front-end (2y yield) has had the most consistent on the day reaction to payroll surprises this year, and the front-end (Eurodollar and fed fund futures) should remain one of the more reliable places to express macro trades. Short-term rate trade should tie in closely with the USD/NAFTA currency trade, while USD/JPY still appears the best place to play long-end spread reactions, especially while equities prove resilient.
Even if the initial reaction to the strong June NFP was tepid, the data point marked a sharp transition from a weak USD in June to a stronger USD in July."
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