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A woeful payrolls gives new life to risk

Chris Weston
Head of Research
9 May 2021
Those trading US non-farm payrolls would have felt it full force given the moves in price.

Others watching from the sidelines would have seen a truly woeful number relative to expectations (+266k vs 1m eyed) and one that economists have been trying emphatically to explain to clients. We’re back to a regime where the confidence in forecasting is just so low that the next payrolls print (4 June) will be treated with a very high degree of cynicism.

It certainly pushes back the timetable for Fed tapering, perhaps to December from the prior expectations of Jackson Hole Symposium (late August). This poses a dilemma for central banks such as the RBA and ECB, who are expected to announce changes to its own QE policy in the July and June meetings, respectively. In a world where you kind of need to keep in lockstep with the Fed or risk currency strength, if the Fed are likely to delay announcing tapering of its QE program, then so too must they.

A softer payrolls is good for the reflation trade – the USD weakened across the FX spectrum – EM FX worked well, notably the ZAR and AUDUSD broke above the recent consolidation high of 0.7813. A closing break of 0.7840 this week would put the 80-handle back in play and the price action I'm seeing suggests greater upside risks in the near-term.

The Aussie budget, NAB business confidence and retail sales pose event risk for the AUD. Although I’d say none of these will be volatility events.

(US dollar index – USDX on MT4/5)


(Source: Tradingview)

Looking at the daily chart, the USD looks vulnerable for further downside, with price breaking below a pronounced broadening megaphone pattern. This has been driven by the move in EURUSD to 1.2160 and that in turn has been driven by a more compelling vaccination rate in Europe over the US. We also see that in the bond market real rate differentials is incentivising capital to flow back to Europe.

The weakness in the USD a clear tailwind for commodities – Gold pushed from 1818 into my target of 1843 on the move lower in US real yields (post payrolls), before settling at 1831. Copper has caught a bid into $4.76 and remains a juggernaut and Crude has also found buyers. This has helped the NOK to eye a new high vs the USD. News of a cyberattack on the Colonial Pipeline in the US has pushed up gasoline futures on open and lifting WTI crude in turn.

(Daily of WTI crude)


(Source: Tradingview)

The crude set-up needs investigation and installs fierce debate among participants– does one fade into the top of the range or have it on the watch list for a closing break to initiate longs?

We’ve also seen a solid bid in equity indices and futures are up smalls on open today. Surprisingly tech, while gaining on Friday, did not outperform as I would expect (given lower real rates) with the NAS100 +0.8%. Small caps have worked well with the Russell +1.4% and I expect follow-through here, so would be long in small size even if implied volatility is low. The FTSE 100 is in beast mode right now and along with the Spanish IBEX was one of the best equity markets last week with a gain of 2.4%. Weakness is a buying opportunity in equity with cyclicals significantly outperforming defensives. High beta working over lower vol stocks and good breadth in the rallies.

The interesting risk this week (Wednesday) will be US CPI, where car prices will boost this metric – headline inflation is eyed at 3.6%, with core at 2.3%. The playbook seems fairly straight forward – a hot CPI print (say into or above 4%) and the USD should reverse higher and may weigh on my bullish short-term view on equities. US banks should work as a hedge against a hot CPI print.

A CPI print close to 3% or below will just increase the dynamic that it gives the Fed less scope to taper and the USD goes lower – while Gold, energy and industrial metals and equities continue their merry trajectory higher.

We also get US retail sales, not to mention the raft of Fed speakers this week, with my pick of the bunch to watch being Lael Brainard, John Williams and Richard Clarida – all doves, but hold significant weight on the board.

We also get Chinese CPI and M2 money supply this week and that shouldn’t be overlooked as a driver of the inflation trade. M2 is eyed at 9.2% (from 9.4%), with new Yuan loans expected at RMB1.6T. Could be one for the AUD traders.

In Crypto, the weekend drama on SNL saw some massive volatility in Doge. However, in the coins we offer Ethereum has been well traded off the lows of 3730. The trend vs Bitcoin remains one-way and the pairs trade works in earnest. 4k in ETH seems like a play for the next few days.

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