Why It’s No Surprise that Payrolls Failed to Save USD/JPY

Daily FX Market Roundup 01.08.16

December’s U.S. non-farm payrolls report completely smashed expectations with 292k jobs created versus a forecast of 200k jobs. Unfortunately the 92k upside surprise along with the 41k upward revision to November’s numbers failed to help USD/JPY. When the labor market report was first released USD/JPY soared to a high of 118.36 but it gave up all of those gains shortly thereafter. The problem was wage growth – it dropped for the first time since 2014. In our non-farm payrolls preview we talked about how job growth needed to exceed 300k to save the markets and while the actual release came very close, wages were key. Had the labor market report been unambiguously positive with every underlying component holding steady or improving, USD/JPY would have cleared 119 but average hourly earnings fell -0.04%, which was significantly worse than the market’s 0.2% forecast. Also wholesale trade sales fell sharply, raising concerns that Q4 GDP will be revised lower. However considering that annualized earnings growth increased to 2.5% from 2.3% and the participation rate ticked up to 62.6% from 62.5%, not all is lost. There’s no doubt that the U.S. labor market is improving but market volatility will determine whether the Federal Reserve raises interest rates in March. We should get a sense of how much the moves in China and the losses in U.S. equities affected the views of policymakers next week with the busy Fed speak calendar. Aside from that, retail sales will be the key report to watch and despite the strong jobs number, expect lower gas prices and weaker wages to have slowed consumption during the holiday season.

USD/CAD traders also struggled with what to make of today’s labor market reports.
Like the U.S., Canada reported significantly stronger than anticipated job growth. More than 22K jobs were added at the end of the year, far outpacing the market’s 8K forecast. However all of the jobs were part time with 6,400 workers losing their full time jobs. Part of this change can be attributed to adjustments from the previous month when full time work rose strongly and part time work fell sharply. Ultimately our outlook for Canada has not changed. Between the fall in oil, contraction in manufacturing activity, sharp drop in building permits and decline in price pressures, we believe that the Bank of Canada will have to lower rates again in 2016. The non-resource economy is improving but not at a pace that is fast enough to offset the drag caused by oil.

Meanwhile the Australian and New Zealand dollars traded sharply lower after today’s U.S. jobs report. For the first time this week, the PBoC set a higher central reference rate for the yuan. This combined with their decision to scrap the circuit breakers helped lift the Shanghai Composite index up nearly 2% and stabilize European and U.S. markets. However many investors are worried that the rapid changes in the way they are managing the breakers and the Yuan reflect their inexperience which could translate into more trouble for the markets. We agree with Goldman Sachs that the devaluation in the Yuan is far from over. We are only in the first year of China’s new 5 year plan to switch from exports to consumption. This will mean slower growth and a greater need to weaken the currency to support the economy. It has been a tumultuous first trading week for the global financial markets and we fear that today’s recovery in the market is nothing more than a relief rally.

After racing to a high of 1.0940 on Thursday, euro traded lower against the U.S. dollar amidst mixed Eurozone data.
In Germany and France, industrial production fell sharply in the month of November but trade activity improved in Germany that same month as the weaker euro helped to bolster exports. ECB member Lane expressed concern about global market volatility and said if data deteriorates in the coming months, more QE may be needed. There are no major Eurozone economic reports scheduled for release next week but Merkel and Draghi are meeting and there could be some interesting comments. If not, the performance of EUR/USD will most likely be driven by China and its impact on risk appetite.

Ten trading days have past without a rally for GBP/USD.
This is the longest stretch of weakness for the pair since September. U.K. data has been weak and while the trade deficit narrowed in November, the improvement was less than the market anticipated with falling exports reflecting weaker demand from Europe and China. However with EUR/GBP soaring from 70 to almost 75 cents over the past month, trade activity should start to improve. The Bank of England meets next week and given the recent trend of U.K. data and market volatility, they will be less inclined to raise interest rates in the near future, which could accelerate losses for the British pound.

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