Payrolls day – buy the USD?

The equity rout in the last few days has provided some nice levels for USD bulls who still believe in the higher rates/higher USD story, which still has some merit as long as the data supports. The ADP data suggested that the 200k median for today’s payrolls is a conservative estimate, so the risk seems to be towards the strong side on the report.

All in all, that seems to add up to a USD buying opportunity provided that strong data doesn’t lead to expectations of higher yields killing equities. Even then, the USD should perform well against the more risk positive currencies, but with these having been the hardest hit in recent days, I would prefer to look for USD gains against CHF and JPY. I don’t have a lot of enthusiasm for selling EUR/USD though – the T-note bund spread is at the bottom end of its recent range and at the moment suggests downside rather than upside. Even if we do get a strong report that pushes US yields up, we will probably also see European yields rise. So on a strong report pure risk plays may be as good as long USD plays. Things like AUD/CHF could do well. Having said this, the technical picture still doesn’t look secure for risk positive plays. I like them medium term, but we may yet see another new low or two before we get a proper rally. For today, I favour a risk rally on a decent number, but it isn’t necessarily the big turn in recent equity weakness (or recent JPY strength). It isn’t really news if the US employment numbers are strong, so other issues (China) need to get a more positive spin before confidence can recover properly.

So while important, this isn’t an employment report that’s going to make everything alright. And market reaction would be much more severe to a surprise weak report.

Elsewhere, another strong Swedish number this morning with industrial production outstripping France and Germany, and despite Riksbank warnings of intervention these are decent levels to get back into SEK. This side of 9.20 in EUR/SEK I see no justification for Riksbank action. It’s also tempting to have a bash at GBP/SEK, which on a break of 12.34 is going south big time.




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