Positioning for payrolls: mission impossible?
Market participants are struggling to prepare for Friday’s US May employment report, with the post release market reaction to any particular set of data as difficult to predict this time as the numbers themselves. On the one hand, a strong release (around 200k on payrolls) would help rebuild market expectations for Fed tapering, supporting US yields and helping the dollar initially. However, over the past two weeks, financial markets have reacted with increasing sensitivity to rising US yields. A rapid move higher in US rates could translate into disruption in global equities and bond markets, including the Nikkei and JGBs and add to pressure on USD long positions vs. core currencies. On the other hand, weak data (below 125k on payrolls) would depress US yields and weigh on the USD further. At the same time, risk markets might react with some relief to reduced prospects for tapering, paving the way for a rebuilding of long USD positions. One mitigating factor is that, following Thursday’s big moves, positioning in many USD pairs is probably much cleaner, with weaker longs having exited. Indeed, part of the pressure on positions this week may have been driven by an effort to reduce long exposures into Friday’s data. While price action post release is likely to be very two way and volatile, we think when the smoke has cleared, the market will ultimately look to rebuild USD longs following an in-line or better result, especially vs. the CHF and JPY. Our economics team forecast a 160k increase in payrolls and an unchanged employment report, in line with consensus.
Read the full report: FX Daily
BNP Paribas