Deutsche FX Daily : Dog days of summer. China leads, payrolls follows: FXWW

From the FXWW Chatroom – Payrolls in the dog days of this summer are expected to lack bite. O//N vol that includes tomorrow’s payroll day for EUR/USD is indicated at 8, USD/JPY ~7.5, and the AUD/USD helped by Aussie data, at 11. For some time now, traders have cared very little about the employment number within the labor market report. The economy is growing strongly, and the Fed is widely expected to continue tightening once every 3 months, unless NFP is likely outside a 100K to 300K range, and, the 3m or 4m moving average also points to a clear departure from trend. Progressively, the average hourly earnings number has become a more important component. This can be seen in Table 2, where the market’s response to stronger than expected earnings very nicely fits a priori theory, namely sell Treasuries, sell equities, buy the USD.

For the July data, the average hourly earnings median can easily mislead, and sets the bar very high for a significant USD positive event. Of the 57 forecasts surveyed by Bloomberg, thirty are going for 0.3%, twenty-six for 0.2%, and only one for an upside miss of 0.4%. The point is the mkt has it about right; if there is a forecast miss from the 0.3% earnings median, it is much more likely to be 0.2% than 0.4%, in keeping with underlying trend. In this context, the data is not seen as likely to give the USD a significant additional lift, even if Figure 1 below shows that the USD has tended to go up versus the EUR on ten of the last thirteen NFP releases.

DB Fig 1.jpg

In the dog days of summer, the market will need to look elsewhere ‘for bite’. For now this is mostly likely to come from USD/CNY. USD/CNH’s break-out on Thursday has been encouraged by generally easy China liquidity conditions. There is still a strong sense that China needs to ease monetary conditions in the face of the slump in almost all money/liquidity measures. However, as USD/CNY approaches 7.00 it is bound to become a ‘political football’. Near 7.00, the US is likely to try push back on what they may see as a lack of official discouragement to stop the CNY’s depreciation. Normally the EUR is the USD anti-pole, pulling all currencies with it. CNY is likely to play the role of USD anti-pole for now. Where CNY goes many other currencies will follow.

As for payrolls, one significant intersection with the China story is that healthy NFP does give President Trump a stronger foundation to negotiate tougher on trade, much as the strong relative US equity performance, notably versus Chinese equities, sends the same message. However, US Administration policymakers are faced with a contradiction. The tougher the US stance on China trade, the more this will encourage USD/CNY to head against the US’s trade interests. Until a weaker CNY also hurts China’s interests (via a loss of confidence, a negative impact on asset markets, or related inflation concerns) the CNY’s weakness could be viewed by China as a remarkably effective counterfoil to US trade measures.

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