Aug 09 Non Farm Payrolls

The marquee event of the week is of course the non farm payrolls release. Coming in at -216k, it represents the slowest decline in the layoff rate in several months. However, the official unemployment rate rose to 9.7% from 9.5%.

My initial reaction was of a bearish one as I thought, ok, so even if the NFP fell less than expected but the labor force could not build on its improvement in the last release, so the market will have to bear the brunt of what even the fed feels is the biggest headwind facing the US economy today.

My feeling was proven right in the first hour and half after the release. The FX majors sold off against the safe havens of the USD and the JPY. Futures traded lower. I rode on a little bit of gains but of course, in hindsight, my view was wrong.

The market decided to see the brighter side of the NFP release and risk taking came back, pushing stocks and higher yielding currencies higher against the dollar. By the end of the night, the dow added about 100 pts.

I guess the market, taking a forward looking view, felt that the slowing job losses is a good sign - that the worse of the US consumer is a passing phase and that now that the overall unemployment rate is closer to it's peak, things might get better from here.

In FX, my bias-ly favoured market, the dollar index lost ground. Looking at price action in the past week, I failed to analyze one thing. The fact that the majors were decidedly rangey was because traders were wary of a more firmly better than expected NFP which will cause a sell off in this currencies against the dollar.

This was what happened in the last NFP release in July. The thinking goes: if the US u/e improves faster than expected then the fed might hike rates earlier, making the dollar a lot more attractive to investors at current price levels. Especially against the yen, as yields on JPY assets are and will be kept low for a longer time.

And now that the thinking has to be shelved for the time being, I am biased to think that the major currencies would build on friday's momentum and advance against the dollar. Especially the Aussie, the only currency whose central bank has given hints interest rate might be hiked going forward.

What do you think?