In our FX review for the week, we note the impact of US employment data towards the end of the week. The large miss in Non-Farm Payrolls on Friday saw the USD weaken. The implications from here of a Fed pause before tightening monetary policy are higher than we previously thought. Aside from the US, risk sentiment was positive for the most part, seeing commodity currencies gain.
US Employment Data
The main event of NFP’s on Friday wasn’t expected to be as big of a shock as it turned out to be, following Initial Jobless Claims on Thursday. Jobless Claims came in at 340k vs 345k expected. This wasn’t anything out of the ordinary, and markets took this in their stride.
There is somewhat of a correlation (albeit not strong) that Jobless Claims should act as a precursor for NFP’s. Although this does hold true in some cases, we don’t pay much attention to it. The main reason for this is that Jobless Claims are measured weekly, whereas NFP’s are monthly. Compiling a four week rolling average from Jobless Claims would be more compelling if looking to make a trading strategy from US employment figures going forward.
NFP’s saw a large miss, coming in at just 235k vs 750k estimated. Although the average hourly earnings ticked higher, the initial move was a knee jerk USD off. This can be seen from the large 5 min green candle on GBPUSD at 13:30, shown below.
It was choppy price action for a Friday afternoon, but key pairs including GBPUSD continued to move higher into the close.
FX Review Points
The main takeaways from our FX review are as follows. Given Powell’s slightly dovish Jackson Hole speech last week, coupled with the NFP miss, the bias leans for the Fed to hold off announcing any tightening of monetary policy at the next FOMC meeting.
We think that markets are going to start to price this in, and so would be looking for short USD trades into next week. Given strong data out from Australia, and somewhat of better control with Covid-19, we think long AUDUSD is a good way to play this.
The market currently trades around 0.7450, and has resistance in the form of the 100 DMA at 0.7506. Beyond this, the head and shoulder neckline from earlier this year just above 0.7600 comes into play. This would be our level to initially target before reviewing things.
Aside from this, we also note the pullback in USDCAD down towards 1.2500. If we wanted to try and protect ourselves in case risk worsens in coming weeks, then adding a long USDCAD position as a hedge would make sense.
We now head into September, and with many traders back from holidays, could see volatility start to kick up again.