US FX WRAP: Dollar surges on hot payrolls to the detriment on global peers, Yen aside

Analysis details (20:00)

The Dollar was notably firmer to end the week, and saw significant strength in wake of the hot US jobs report to hit highs of 109.97 vs. 109.12 pre-data. Recapping, the headline surged to 256k (exp. 160k, prev. 212k) past the top end of expectations and the unemployment rate unexpectedly fell to 4.1% from 4.2%. In wake of the dataset, a broad-based hawkish reaction was seen with downside in Treasuries and US equity futures, and a notable repricing in Fed money market expectations. Now there is just 29bps of easing priced for 2025 now, vs. 39bps pre-data, and the first cut priced in by October (prev. June). Since, there has been a mass revision of sell-side calls for the Fed with the most striking being Bank of America no longer expects more Fed rate cuts. Elsewhere, prelim UoM for January saw the headline miss but accompanied by a notable move higher in inflation expectations as the longer-term 5-10yr jumped to 3.3%, the highest since ’08, while the 1yr rose to 3.3% from 2.8%. For the record, there has been some Fed speak (Schmid, Bowman, Musalem, Goolsbee) but on account of the other macro themes garnered little market reaction, albeit Goolsbee was the only one to speak post-data, who was his usual dovish self, but Schmid and Bowman were their usual hawkish selves. Ahead, US CPI next Wednesday is the key schedule risk event in addition to appearances from the influential FOMC Vice Chair Williams.

G10FX was largely weaker and broadly a function of the Dollar strength and risk off sentiment in wake of the aforementioned US jobs report. As such, high beta FX underperformed, with Cable hitting a more than 12-month low of 1.2193, against an earlier high of 1.2321, while AUD/USD and NZD/USD fell to 0.6140 and 0.5544, respectively. Currency specific newsflow was fairly sparse with macro sentiment dominated by US data. However, concerns remain in the UK on rising borrowing costs and the lack of fiscal headroom for the Chancellor, with spending cuts expected at the Spring budget to adhere to the fiscal rules. To next week, UK CPI (Wed), ECB Minutes (Thurs), Australian employment (Thu), UK GDP (Thu), and UK retail sales (Fri) are the highlights. In Scandinavia, Norwegian core inflation for December Y/Y printed 2.7%, shy of the expected 2.8%, and also Norges Bank’s forecast for the month.

JPY outperformed amid risk averse trade highlighted by USD/JPY hitting a low of 157.23 against an earlier peak of 158.87. Prior to US data, Yen saw strength in the European morning on Bloomberg source reports, which noted the BoJ is reportedly mulling the rate decision for January, considering upgrading core-inflation forecasts for FY24 and FY25, and to be mulling raising inflation forecast amid JPY. On the meeting, no decision has been made on raising rates and intends to wait until the very last moment before deciding on increasing rates.

CAD saw slight losses, but was one of the better G10 performers amid its own employment data, which saw the headline figure smash through expectations, exceeding the top end, and the unemployment rate unexpectedly fall. As such, this initially buoyed the Loonie to lows of 1.4376, but swiftly pared, and weakened, on US metrics at the same time.

EMFX was exclusively weaker. Aside from the known themes, the Yuan saw Chinese officials jawboning overnight. Highlighting this, China's Finance Minister expects a more proactive fiscal policy in 2025, in terms of its strength, efficiency, and timing, and added that fiscal policy has abundant policy room and tools. Separately, the PBoC is to temporarily suspend purchase of government bonds in the market during January and may resume government bond trading depending on supply and demand. Looking ahead, Chinese Trade Balance (Sun) and Activity data/GDP (Fri) will be in the diary to look out for.

10 Jan 2025 - 20:00- Fixed IncomeData- Source: Newsquawk