September 06, 2024

“It’s a huge day for FX – after last month’s non-farm payrolls report ultimately triggered a bout of historic volatility, markets have understandably built up high expectations for how today’s release might play out. The size of the September US rate cut is potentially at stake.”

Tim Hallinan – Trading Director

USD

Today’s non-farm payrolls report could be one of the most volatile data releases of the year. At least that’s how the market was pricing it yesterday, with the highest overnight implied volatility for EUR/USD since the regional banking crisis in March 2023. The leading data so far this week has been broadly negative for the labour market and yesterday was no exception. While in practice poor at predicting the official payrolls report, it was hard for traders to ignore the 99k ADP number, which was the worst since 2021. Unemployment claims actually came lower to 227K and the ISM services index printed slightly higher than expected at 51.5 but, with the focus on the labour market as the ultimate decider for the pace of rate cuts, it was the employment subindex slipping to 50.2 that captured attention. Last week’s survey put today’s payrolls figure at 165K, although it appears to be widely assumed that the softer indicators this week have pulled expectations down. A 50bps cut this month is currently priced at 40% – a weak figure would ratchet this much higher, while a strong one would squeeze it out. Williams and Waller both then speak this afternoon for some live Fed commentary ahead of next week’s pre-meeting backout.

JPY

It is worth a note on the yen’s remarkable run this week as it pushes towards 140 – USD/JPY is down over 3% since Monday afternoon, and by 0.8% just this morning. Of course, there has been a fundamental pivot in the rates stories, with 10-year US Treasury yields falling quite dramatically ahead of Fed rate cuts, just as markets look to additional BoJ rate hikes. There has also been some safe haven demand amid some pre-payrolls nerves – something that the Swiss franc has benefitted from too.

GBP

The UK data calendar remains sparse and trading in GBP/USD will be entirely a product of US non-farm payrolls this afternoon. The softer data from the other side of the Atlantic has lifted sterling back towards the 1.32 mark and to its highest level in a week. Next week is when the domestic data really comes into play, with wage growth and GDP data ahead of this month’s Bank of England decision.

EUR

The euro experienced some choppy trading yesterday on the back of volatility in yields. The biggest news yesterday was in French politics – right-wing former Brexit negotiator Michel Barnier was picked as the new prime minister, after several months of Macron searching for someone that the spit National Assembly would not refuse. There was no immediate market response – bondholders are not ready to get excited about the prospect of real fiscal tightening any time soon – but how he goes about putting together a budget over the next few months could be significant for the euro. German data was once again disappointing this morning, with industrial production contracting by 2.4%, but it’s the US macroeconomic calendar in charge today.

Markets

Markets remain nervy and are unlikely to turn upwards today unless non-farms surprise to the upside. The Dow, S&P 500, and Nasdaq all fell yesterday, while Europe’s STOXX 600 slipped by 0.5%. Oil closed at its lowest level since December and is heading towards its worst week in over a year, even as inventories

Main Economic Events (All Times CET)

9:00am: Swiss FX Reserves
11:00am: Eurozone Final GDP q/q
2:30pm: Canadian Employment Change
2:30pm: US Non-Farm Payrolls & Unemployment Rate
5:00pm: Fed’s Waller speaks

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