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US jobs soar, yen in focus

by Ashraf Laidi

Both the US dollar and bond yields surged following a robust US jobs report bolstered the case for a Fed rate hike to occur as early as June, according to fed funds futures. US non-farm payrolls surged by 257K in January from an upwardly revised 329K, following a net 2-month upward revision of +147K. The unemployment rate edged up to 5.7% from 5.6%, with the underemployment rate also rising to 11.3% from 11.2%.

The labour participation inched up to 62.9% from 62.7%, further affirming a base since April 2014 and regaining its 3-month moving average. Stabilisation participation has helped alleviate concern with the rise in the jobless rate.

Wages normalize but volatile

On the pay front, average hourly earnings growth jumped to a six-year high of 0.5% month-on-month, after contracting by 0.2%, the biggest decline in record. The less volatile year-on-year series rose to a 14-month high of 2.2% after 1.9% in December. The increasingly important pay data are crucial for the Fed’s timing in determining the first rate hike, but volatility means the Fed will require more data to overcome its preoccupation with deflated pay growth.

How bad is good news?

The question whether good economic news is bad for markets on the premise that it accelerates the arrival of Fed tightening could materialize in the next few weeks as US exporters and oil companies lick the wounds of eroding FX translation and slashed capex. The fact that the Dow Jones Industrials Index curtailed its post NFP gains from triple digit on the futures to +30-60 pts after the opening bell is a reflection of lack of preparedness for a Fed hike.

Traders will watch the minutes of the Fed’s January 27-28 FOMC meeting, due out for release on February 18th. For the first time over the last 10 years, the FOMC statement referred to “international developments” in its January meeting, as a key element to watch, in addition to the existing list of “labour market conditions, indicators of inflation pressures and inflation expectations”. US companies will be hard to ignore. Any detail on the Fed’s assessment of the negative USD impact on US exporters will be taken by FX traders as a hint of concern, which could diminish expectations of 2015 rate hike expectations to the detriment of the USD.

Harada yen sell-off will finding support

The Japanese yen emerges as the biggest loser on a combination of a double positive surprise from the US and Canada jobs reports as well news that the Bank of Japan would replace dovish policymaker Ryuzo Miyao with another a more dovish and pro-reflation member Yutaka Harada. The move may raise odds of additional BoJ easing in Q2, especially as the central bank prepares markets for a delay in meeting its 2.0% price growth target. Harada is regarded as staunch supporter of the BoJ and PM Abe’s commitment to combat deflation.

Yen bears, however, must take notice of recent remarks by BoJ governor Kuroda indicating the central bank would not take new easing measures if prolonged decline inflation were caused by falling oil prices. Moreover, not only Japanese firms are struggling to attain the wage hikes encouraged by the BoJ, but consumers are unlikely to deliver the added momentum to combat oil-driven price declines after the April sales tax. 199.50-60 remains the key point to break for USDJPY bulls.

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