Re: nfp

FX Update: Nonfarm positive surprise: shouldn't USD rally?

John J. Hardy, FX Consultant, Saxo Bank

The employment report was far stronger than expected as the US data has really tried to turn the corner this week after this report and the ISM manufacturing data. The initial reaction was for a USD sell-off today - but why?

US employment report

The US employment report looked quite strong on the surface, with a private payroll increase of +40k (Here's a link, by the way, to the full report from the US BLS, it's actually rather enlightening to look through the details, which don't look particularly impressive this time around, considering that two of the three largest growth categories in payrolls were a 28k increase in health care workers (more of a cost to society than a source of growth) and a 17k increase in temporary office workers. These are not huge numbers for an economy that has over 300 million participants, though, of course, it is at least not a sign of further deceleration in the economy at the moment (the Jul. revision added +36k to the private payrolls as well - though the irony here is that this makes the August number look like a decrease in momentum from July). The unemployment rate increased slightly to 9.6% as expected and the other numbers were fairly healthy as well, with earning increasing more than expected and the average weekly hours stable at 34.2.

US Employment report: market reaction and market logic

Here is the market's apparent logic of late: we supposed to sell the USD because the economy in the US is looking so terrible and weak data means ever lower US yields and a Fed that will devalue the USD to save the economy. If the data in the US is good, however, we should also sell the USD because this is good for risk appetite in general and the US economy is still weak on a relative basis and there are far better growth opportunities elsewhere.

In this logic, it appears that the only upside for the greenback is if the data is bad for the US and the market decides to get negative on the rest of the world as dashed hopes abroad trigger a reversal of the structural short USD trade. This just somehow doesn't seem fair: at least EURUSD ought to sell-off here in the short term regardless of the direction in risk appetite as good news this week for the US really flies in the face of the prevailing picture heading into this week of a collapsing US and resilient Europe. Ditto for GBPUSD, as the UK has seen a few ugly numbers this week relative to expectations.

(Note: of course, as we write this EURUSD and GBPUSD went from spiking higher to reversing, underlining that the upside argument here for those pairs is difficult to support)