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Risk on After NFP Data Smashes Expectations by Unbelievable Margin




Markets are in risk on mode follow the latest official US jobs report. The S&P 500 has stormed back to levels not seen since late February, WTI crude oil nearly reached $40/bbl, and gold has just dumped by some $20. The US economy added a record number of jobs in May, 2.5mln to be precise, while the unemployment rate fell to 13.3% from 14.7%. Expectations were for 8mln jobs to be lost in May, so this number beat expectations by an incredible 10.5mln!! Naturally, the unemployment dropped rather than rising to 19.8%, as expected. Put simply, the US economy is in FAR better shape than anyone had previously thought, hence the risk on market reaction. The impact of the data on USD was mixed. Initially, USD was stronger, but as the risk on move in other assets extended, USD has been coming under pressure again (understandable, given that USD is a safe haven). CAD (which had its own much better than expected jobs data at the same time as the US data), GBP, NZD and AUD have subsequently been the G10 FX buys in wake of the US jobs data. GBPUSD has extended on earlier gains to trade around 1.2700, AUDUSD is trying to reclaim 0.6700 and NZDUSD is at highs of the day around 0.6525.


What does this all mean for USD going forward? Can strong NFP data save NFP? As I speculated in yesterday’s blog, and as evidenced by today’s market reaction, no, strong NFP data cannot and probably will not save USD. Yes, the US economy might be in a better shape than we had though, but unemployment is still at 13.3%, well above what is considered full employment by the Fed. Therefore, though the data is encouraging, it will do nothing to persuade the Fed not to continue with its uber dovish QE and lending programmes over the coming months/years. And this all goes to exactly what has been slamming USD so much since its peak amid the global USD funding squeeze in mid-March – the Fed is out printing all of the other major global central banks combined (just look at the Fed’s rate of balance sheet expansion compared to the ECB and BoJ). This is a HUGE negative for USD. Throw in increasing risk on amid improving Eurozone economic sentiment (thanks to the ECB and movement towards a deal on the EU Recovery Fund) and slowing Covid-19 infections rates in key markets, despite their economies being reopened, and that is a very toxic cocktail for USD. More USD downside ahead (in my view), which should boost the rest of the G10, regardless of their own specific risks (like US/China tensions for AUD and NZD and Brexit for GBP). 

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