The market reaction to the US nonfarm payrolls may well be hyperbolic as traders’ nerves have been quite tense since the beginning of the year.
The US economy is expected to have secured a solid 200’000 nonfarm jobs in December. But of course it is not only about the quantity yet also about the quality. Besides the number of jobs added, the improvement in wages and the participation rate will also be closely monitored. The wages are expected to have improved by 2.8%y/y in 2016, the unemployment rate is seen stable at 5% although the participation rate deteriorated significantly during the year due to structural and demographic changes. Should the numbers please, the first labour data could well give some comfort to Fed hawks and lend some support to the US dollar. If not, the sentiment in the US will certainly turn sour. In the worst case scenario, the market could start questioning whether the Fed’s 25 basis points hike was premature and how realistic is the 1% hike through 2016.
The dollar index failed to take over the 100-handle since December. The US sovereign yields resist on the dovish Fed risks as the WTI hit a 12-year low and the US stocks extend losses along with the global equity complex.
The market gives less than 50% chance for a second rate hike before June.
To avoid direct volatility, traders may consider taking their positions on the cross pairs. In this context,
- EURJPY could offer an interesting downside trend below 128.60, major 38.2% on the weekly slide.
- GBPJPY is deeply oversold (RSI 17%) and surpassing 175.00, minor 23.6% on November-December sell-off, further correction to 177.65 could well be considered.
- EURGBP rebounded lower from 0.7470, a stone’s throw lower than October pick of 0.7493. Macro funds could well jump in to sell the rally at 0.75+ to trade the divergence between the BoE and the ECB.