London Session: Some thoughts pre-NFP’s….

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By Kathleen Brooks | February 2, 2013 12:58 AM EST

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It's less than an hour until we get the January Non-Farm payrolls number. Here are a couple of thoughts before the madness begins.

  •  This figure is the most important data release of the month because the Fed has tied future monetary policy stimulus to the unemployment rate. Even if you think the unemployment rate doesn't reflect the true state of the US economy it's the only line the Fed has thrown our way. The Fed won't stop QE until the unemployment rate falls to 6.5%, thus any decline in the current 7.8% rate is likely to be dollar positive in the medium term.
  •  The market seems to be positioned for a strong labour market report - take a look at USDJPY's rally above 92.00 this morning. Although the SPX 500 backed off 1,500 yesterday it is hardly a significant pullback and bullish sentiment persists across asset markets. Thus, a disappointing number is a key event risk this week, which could cause 1, a decline in the dollar and 2, a re-assessment of the economic outlook in the US, which may weigh on stock markets.
  •  To complicate things further, temporary hiring over the Christmas period makes the January payrolls even harder to predict than normal. A bad number may not be a true reflection of the state of the economy as it may be affected by companies cutting staff after the holidays.
  •  This is unlikely to stop the market from running with the figure and potentially causing some sharp whipsaw action in the FX and stock markets immediately after the release. The market is thirsty for a gauge of US economic activity after the dismal Q4 GDP data. So payrolls - good or bad - will likely dictate the tone of market sentiment in the coming days.
  •  When you talk about payrolls you have to concentrate on USDJPY. This cross is very sensitive to movement in Treasury yields. The 10-year yield broke above its recent range and has been hovering around 2% in the last few days. If we get a poor number yields may nose-dive, dragging USDJPY down with it. Since USDJPY is fast approaching overbought territory on a daily basis - the daily RSI is currently at 77 (80 +is overbought) - any move lower in yields may cause a sharp selloff in USDJPY. Support zones to watch include: 91.70 then 91.35.
  •  A stronger yen could also impact other yen crosses especially EURJPY, GBPJPY and AUDJPY.
  •  As long as the number doesn't suggests a materially weaker US economy in Q1 then we would expect the yen crosses to be bought on any weakness in the coming days.

Chart 1: USDJPY and US 10-year Treasury yields


Source: and Bloomberg


Chart 2: EURJPY - at risk from a potential sell off?


A short -term pullback on the cards? This cross hit resistance at 126.00, and the hourly RSI has turned down after moving into overbought territory above 80.00 earlier.


Best Regards,

Kathleen Brooks| Research Director UK EMEA |

d: +44.(0).20.7429.7924 | f: +44.(0).20.7929.2010 | M: +44 (0) 7919.411.957 | e:| w:

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