US500

Volatility rises as US payrolls looms large

Chris Weston
Chris Weston
Head of Research
Jun 3, 2021
The USD has bounced back – US Treasury yields are higher with 5-year Treasury +5bp to 84bp, inflation expectations have held firm, so US real rates have moved higher – not great for risk or sentiment.

Crypto has seen incremental gains, with Bitcoin edging to 40k, but generally the typical liquidity beneficiaries have been sold.

Here we see equities are modestly lower, although tech has really underperformed and names like Tesla, Baidu and even Apple have attracted short interest. Tech is looking pretty shaky and ultra-high growth and high valuation space needs attention. Gold and Silver have seen good selling in this backdrop and once again good US data - ADP payrolls, jobless claims, and ISM services, hasn't been taken well by the precious metals market.

I said Gold was a better hedge against disinflation (rather than inflation) this week, yet I’d refine this as a better hedge against economic fragility. If you want cyclicals in your portfolio that benefit from economic re-openings and growth, then offset this to an extent with a holding of Gold. As we’ve seen good US data has resulted in higher bond yields, USD strength and subsequently lower Gold. A test of the March uptrend at 1855 beckons.

Daily of Gold

04_06_2021_D1.png

(Source: Tradingview)

A US payrolls playbook

All eyes will be on US payrolls (today 22:30 AEST) where the consensus is for some 664k net jobs, while the unemployment rate is expected to drop 20bp to 5.9%. We can talk hourly earnings and the U6 unemployment rate as well, but the algo’s will key off the headline jobs print. I am not even going to try and predict this one, it's a lottery. Although the so-called ‘whisper number’ is closer to 790k.

The question then becomes whether payrolls could be a volatility event and do I want to reduce my exposures into the event itself, as a consideration in the risk management process? Of course, the degree of movement that will be seen in the market will be a function of the extent of the beat or miss, but clearly traders are covering USD shorts into the jobs data.

As a rough guide, I’d argue if we see 1m jobs or more then AUDUSD will be -1%, while EURUSD will be -0.8% or so and USDJPY +0.8%. Between 250k-500k jobs and we’ll potentially see USDJPY -0.6% to 0.8%. Tech and Gold working nicely higher on a poor number (relative to consensus) and obviously this move will be more pronounced the lower the print. A number in line will not give us much to work with, so the moves in the market will be dictated by the broad quality of factors – revisions to the April print of 266k, the unemployment rate, hourly earnings, etc.

Can the USD flow last?

04_06_2021_D2.png


(Source: Tradingview)

If we look at the DXY index on the daily, the downtrend gave way yesterday, after a period of consolidation had pushed up with good range expansion. Price has closed above the 5-day EMA so that has caught my attention, but it takes a brave soul to take longs in the USD – on the daily time frame anyhow. Of course, those who hold FX exposures for minutes and hours may be cognisant of this overview and structure, but would be seeing different intel on their lower timeframes. Still, if I look at the USD I like what I see notably vs the AUD and NZD. AUDUSD breaking the range low of 0.7678 and could be destined for 0.7560 – obviously US payroll dependent.

04_06_2021_D3.png

(Source: Tradingview)

AUDUSD may be also weighed on news RBA gov Lowe will hold an extraordinary press conference at 4:00 pm on 6 July 2021, shortly after the key RBA meeting – this has got a few quite excited about the findings of the RBA meeting. It promises to be a volatility event and the debate flares up between traders and economists.

  1. Will they roll its 3yr bond target to the November 2024 maturity 
  2. Extend QE by say $100b and buy at the current pace or even reduce the weekly pace (taper).

EURUSD has now closed below trend support and the 1.2160 range low – a support level I’ve raised a few times. I favour EURUSD shorts, but again it’s a genuinely risky trade on the 4hr or daily. Consider then that next Thursday we get the ECB meeting and that could also be a huge event for markets. Again, the market is fairly dovish in its view of the outcome of the meeting in which the bank will detail its plans to continue purchasing assets at a monthly clip of E80-90B p/m. The key risk is for a EUR squeeze higher as there's a range of mixed views on the Governing Council – put it on the radar though, as it could be a highlight for next week.

For price action traders, we see bearish outside weeks on GBPUSD too, where a close below 1.4091 would confirm that.

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