The nonfarm payrolls fell far short of expectations and the unemployment rate rose again, and this was doubly surprising because of the recent appearance of improving data out of the US. Does the weaker greenback in the wake of this data make sense, however?
USD and US Employment Report
If there is one phenomenon we have been used to for many months now, it is the idea that the USD and risk appetite are irretrievably joined at the hip, with the USD falling every time equities rally and vice versa. We noted yesterday that the strength of this correlation seemed to be fading a bit, since many of the major equity indices were at new highs while the USD was still well off its recent lows. After today's data, it appears the predominant thought is not of risk appetite, however, but the implications of this poor employment report on the Fed's quantitative easing plans, which theoretically move back into high gear in the wake of a report like today's. After all, half of the Fed's mandate is related to employment (the other half being inflation).
So today's ugly US employment report has really confused the market here. In normal times, it is bad for the USD to have negative US data - but these aren't normal times. The question in these times is how the market chooses to react to the negative data in terms of risk appetite (higher because more easing keeps the liquidity party going or lower because the market finally starts to worry about growth implications of bad data?).
After the ugly data today we are seeing risk selling off, which has normally been USD supportive in this market cycle (regardless of the fundamental implications for the US economy). Something is not right here unless we are moving into a new market paradigm: it's fine and makes sense for USDJPY to drop on today's market reaction to the US data. It also makes sense or EURUSD to squeeze a bit higher as Euro sovereign risk spreads are easing and this data suddenly makes the US economy look relatively worse. But should AUDUSD to rip higher here? That makes no sense. Risk appetite should be the sole determinant of that pair's direction and has been nearly tick for tick, seemingly forever. So the current reaction pattern cannot stand - either AUDUSD falls as equities fall or equities shake off the bad data here and rally and in doing so also justify the extension of AUDUSD higher today. (A few minutes after we are writing this, the market is bearing this out as stocks have bounced smartly - there are surely arbitragers and HFT operators looking at these kinds of opportunities.)
As for the US employment report itself - it was pretty darn ugly, with a much smaller than expected rise in payrolls and an unemployment rate that ticked strongly higher to 9.8%, the highest level since April, even though the participation rate remained unchanged at the lowest level since the mid-19080's. (Had the participation rate remained relatively unchanged since 2005, we would be seeing an unemployment rate well north of 12% during the recession). Another negative was the no-change in average hourly earnings, suggesting that the US worker's lot is not improving - that shouldn't be a huge surprise considering the slack in the labor market, but it is a very weak data point and the year-on-year level is the lowest since the survey began in 2006.
Whoa USDJPY!
USDJPY was a huge mover in the wake of the numbers, on a "good old fashioned" move lower on the combination of a strong bond rally and belly up in equity markets. Remember that the important support was around 83.15 on an Ichimoku cloud basis, so if the pair closes below that level it suggests the risk of the old downtrend re-establishing. One could argue that the 55-day moving average at 82.63 is also important and that is also close to the day's low so far and has proved an important MA this year. The bottom of the Ichimoku cloud comes in at around 82.00 currently.
