FX Daily: High-Stakes Payrolls

Kevin Warsh’s ambiguity at the July FOMC means data releases like today’s payrolls carry greater risks of an outsized market reaction. Our call (70k) is close to consensus (80k), with only a tick higher in unemployment to 4.3%, which could drive a small dollar drop. We are still looking at no Fed cuts and dollar softening going forward.

USD: Unemployment rate can tick higher today

Our latest fair value models show that short-term rate differentials have become increasingly the predominant driver of USD moves of late. Federal Reserve Chair Kevin Warsh’s ambiguous communication incidentally means more flexibility for markets to interpret data under the policy implication lens. That makes today's US jobs report potentially very important in determining whether September hike expectations are reinforced or unwound. Pricing has been remarkably stable at 14-17bp since the July FOMC.

Our macro team’s call is 70k for July’s payrolls today, a tad below the 80k consensus. We expect a modest rise in unemployment to 4.3% on a higher participation rate (consensus is 4.2%). This scenario could result in a slightly softer dollar, but should not drastically change markets’ conviction levels about the September FOMC. A decisive break in the dollar may have to wait for next week's CPI release.

The dollar has regained a bit of ground into today’s release. The main drivers were primarily some souring in risk sentiment and an oil rebound on poor Gulf headlines, but some precautionary dollar buying into today’s data event might also have played a part. Last week, this dynamic amplified the negative dollar reaction to the FOMC.

For now, our call remains one of USD weakness in the next couple of months as we expect the Fed to stay on hold this year. But we see a greater chance that next week’s CPI and the batch of August data will deliver a clearer dovish narrative to the front end and take the dollar more sustainably lower.

USD/JPY should prove to be the most sensitive G10 pair to the payroll release today. Markets are already rebuilding JPY shorts after the coordinated US-Japan intervention, and rising bets on a Bank of Japan September hike are doing little to help the yen. We are targeting a return to 160 in the next few weeks before returning to 158 by the end of the year on the back of our dovish Fed call.

EUR: Growing volatility around US data

In the past year, EUR/USD has moved on average 0.2% in the hour after the NFP release. The past two prints both saw moves of 0.4%, though, positive in July and negative in June. Those moves were also larger than in other recent instances with comparable payroll surprises.

That fits into our perception of greater data-related FX volatility under Warsh. And we suspect the market’s sensitivity to the release could be even larger this time, given the lack of conviction about the Fed’s September meeting.

In our baseline scenario, we expect EUR/USD to stick to a 1.150-1.155 range into next week’s US CPI. Our short and medium-term views are unchanged: we're still leaning bullish on EUR/USD with 1.16 one-month and 1.18 year-end targets.

CAD: Downside risk for Canadian jobs data today

Canada releases jobs figures at the same time as the US today. That often leaves USD/CAD reacting more to US figures. Incidentally, a dovish print for the Fed tends to see CAD trail other pro-cyclical commodity currencies due to the correlation between USD and CAD rates. All this means the net impact of Canadian jobs data may need to be assessed in the crosses and with some caution.

Consensus is looking for another good print in Canada today: employment rising for a third consecutive month (+20k) and unemployment holding at 6.5% after June’s decline. We do see some downside risks relative to consensus, but our perception is that markets remain too hawkish (18bp by year-end) on the Bank of Canada regardless of the jobs picture. We’d need to see that heating up quite materially to offset the otherwise muted inflation outlook.

We have not changed our USD/CAD forecasts significantly this month. We are expecting a gradual move to 1.38 by year-end on the back of USD weakness, but still see CAD trailing most other G10 currencies in the process.

CEE: Dovish signals are back in the driver’s seat

Yesterday's Czech National Bank meeting delivered a dovish surprise for markets, with the new forecast pointing to unchanged rates and Governor Aleš Michl reinforcing that message. Although we had expected a dovish tone and unchanged rates at 3.75%, the magnitude of the surprise was reminiscent of the earlier end to the debate on possible rate hikes. After the meeting, markets priced out roughly half a hike, leaving expectations at around 1.5 hikes. This remains well above our unchanged-rate forecast and still makes Czech rates the second-most hawkish market in EMEA after South Africa. Given the dovish press conference, we expect markets to continue reducing tightening expectations. The global backdrop remains important, but we see pricing stabilising around one hike as protection against higher oil prices. In our view, the curve still has room to move lower, with a bias towards steepening.

EUR/CZK rose 0.2% to 24.235, but the moves in rates and the interest rate differential point to levels closer to the 24.250–24.300 range, which we see as the likely landing zone. Tomorrow’s CNB meeting with analysts should generate more headlines. If the dovish tone is confirmed, the koruna is likely to face further weakening pressure.

In Hungary, inflation for July this morning dropped from 1.7% to 1.2%. The National Bank of Hungary had expected 1.9% in its June forecast; in turn, the deviation widened from 0.3ppt to 0.7ppt in the central bank's forecast. We expect a decrease in inflation across the board, which will be welcome news for the central bank. After the new wave of escalation in the US-Iran conflict, the market has priced out a large part of the easing and is currently pricing in about 90bp. Today's inflation number should therefore provide a signal for the market to return to more dovish pricing. EUR/HUF has returned to 365, the highest level since the elections, and global uncertainty around local energy supply problems will probably keep the forint weaker for a longer period.