Traders left in the dark after NFP report, G20 meeting: a debrief

Forex News and Events

Last US job report left investors in the dark (by Arnaud Masset)

The last US job report left the market a bit disappointed as it didn’t add clarity to the timing of the first rate hike by the Federal reserve in almost 10 years. The change in non-farm payrolls was surprisingly low (173k vs 217k expected) while the data from the previous month were revised substantially higher (to 245k from 215k). Traders have been left to their own devices and have been unable to choose a clear direction in both bonds and FX markets. The US 2-year treasury yield fell to 0.6568% and jumped to 0.7206% in a matter of minutes while the 10-year dropped to 2.1050% and bounced back to 2.1633% over the same period. In the end, yields returned to their initial levels. EUR/USD was also very volatile as traders tried to price in the new information, the currency pair was trading widely between 1.1190 and 1.1090, and finally stabilised around 1.1160.

With the US markets closed today due to Labour Day and a light economic calendar, trading volumes are expected to remain thin today. Traders will have to wait until Thursday to get some serious data from the US while the tension will grow until next week FOMC meeting. Expect a highly volatile market.

G20 meeting (by Peter Rosenstreich)

The Group of 20 (G20) released their communiqué after a two-day meeting in Ankara which pledged to refrain from currency manipulation. In strong wording the G20 made direct comments over competitive FX devaluations, “to move toward more market-determined exchange rate systems and exchange rate flexibility to reflect underlying fundamentals, and avoid persistent exchange rate misalignments”. And “We will refrain from competitive devaluations, and resist all forms of protectionism”. This was the first time the G20 has used such direct wording since 2003. We suspect this statement will have limited impact of global central bank’s monetary policy setting strategies. Currency manipulation remains an easy solution to boost growth through stealing exports demand and is unlikely to quickly be abandoned by central banker. The recent volatility has highlighted the risk of artificially pricing in FX and is likely the primary justification behind the statement. Also in the G20 communique was a message that global growth “falls short of our expectations” yet are “confident the global economic recovery will gain speed.” For us this statement indicates that traders should brace for more FX volatility as the policy divergence theme entrenching itself in the fall. We are significantly concerned over commodity and EM currencies moving forwards. We are hearing growing rumors that recent EM weakness has begun to highlight USD funded debt deficiencies.

On Tuesday, Japan will release its second estimate of Q2 GDP which is anticipated to be revised lower to -1.8% from -1.6% q/q. Weak exports and soft consumer spending (and weather) were the primary contributors to the growth data contraction. Since the first estimate Japanese economic data (including exports and factory output) has continue to weaken while events in China will assuredly damage Japan short-term prospects. JPY appreciation has been driven by carry unwind in an safety seeking environment. However, with stability slowly re-entering the financial markets traders will focus back on Japans unsteady fundamentals. The deceleration of the “Abe” miracle, aimed at lifting the economy out of deflation and suboptimal growth, will put pressure back on Prime Minister Shinzo Abe to expand his monetary and fiscal stimulus. Given the refocus on fundamentals and return of using JPY as a primary funding currency we anticipate USDJPY to trade back towards 121.75 resistance.

GBPUSD - Breaking Support at 1.5171