No matter what, let’s hope this morning’s non-farm payroll print gets to create some volatility in forex-land. Being confined to endless tight trading ranges is making the life of an FX trader rather dull and, for some, even difficult to make a living. Dealers and investors thrive on volatility, in fact they require volatility to survive. Trading within a contrived and confined trading range is tedious, painstakingly slow and leads to further inactivity. This market requires an impetus and with today’s NFP report, the first of a plethora of backdated economic releases that were put on hold with the U.S. partial government shutdown, let's hope we can get it and some action.
September's non-farm payroll release finally sees the light of day this morning. The danger is that given the report will cover the period before the U.S. government partial shutdown and debt ceiling saga, it is not expected to provide a "eureka" moment beyond telling the market how the U.S. economy was performing heading into October. A disappointing headline will only confirm to the market “tapering will be delayed”.
In contrast, a strong report with positive revisions will convince the market to perhaps entertain the possible risk of a December "taper." It’s a risk that cannot be completely ignored, however, even the fixed income market has not been pricing in wholly a December Fed move. Their yield curve is looking at the possibility of something happening near the end of Q1, 2014 – perhaps the March FOMC meet, with the end of QE occurring in H2 of next-year. Currently, the removal of the twin risks of a Chinese hard landing and Fed tapering is providing a significant positive backdrop for risk markets – dragging global equities to new heights. But, with U.S. lawmakers only postponing the decision on the debt ceiling debacle without a solution and the possible threat of a repeat of what global markets were witnesses to over the past couple of weeks, it has made for hesitant traders. Investors are lacking confidence and require some airtight strong data to convince them otherwise.
The market if anything has revised down ever so slightly the consensus numbers for this morning’s jobs report. The revised expectations are +165k for total non-farm payrolls and +175k for private jobs. The prominent reasons being batted around for a slight reduction in the forecasts has to do with first, the ISM non-manufacturing jobs index correcting sharply in September and second, on the back of the sharp decline in claims over the September period being technical (computer glitches in California jobless claims reporting) rather than any fundamental improvement.
Last time out the unemployment rate surprise was a function of the U.S. participation rate dropping. The market is forecasting for another tick down to +7.2% for both structural (demographic) and cyclical reasons. Before committing yourself wholeheartedly, take a gander at the participation rate.
Markets reaction to a surprise is difficult to gauge in the current trading environment – apathy is widespread. Since the U.S. government shutdown was postponed last week, the various asset classes have been capable of pricing out some of the potential anomalies. This also includes a rather negative reaction by the market towards the USD. A weak headline print number would provide more fodder suggesting that the labor market was already weak heading into this month's U.S. confidence shock, while a strong figure would probably be dismissed – FI dealers have witnessed Treasury market prices constantly ticking over.
The parameters are relatively wide for the NFP report. A headline print north of +230k would probably begin to eat into the dollar negativity cycle that the market is currently witnessing. Any number close to market expectations (+180k) will favor the dollar "bears." Currently, it seems that with such shallow pullbacks in the EUR that this market only wants to go one direction at the moment and that is not USD positive. If risk were to be applied then EM currencies with some yield should remain in demand -basically more of the same.