The UK election results are a shocker – after so many signs and stories regarding the intense uncertainty and risk of a hung parliament or weak minority government, it looks like we are headed for a clear Conservative victory, and possibly even an outright Conservative majority.
Let’s not get carried away with the reaction in GBP, however, where the likely cause of the dramatic upside reaction is on large binary/low-delta option bets on the outcome. From here, we’ll need to watch whether the market focuses on the ugly structural position of the UK and Bank of England guidance. A very strong US employment report today could even mean a full reversal of all the overnight gains.
Chart: GBPUSD
Cable exploded higher through stops (and likely on leveraged binary bets on the low-odds outcome that we are witnessing), but let’s see where we settle on the day and in the days to come. It is quite clear that the 1.5500 area is a major technical pivot zone and the next most important step will be next Wednesday’s BoE Inflation Report. To the upside, the 200-day moving average looms as the next objective on a weak US jobs report.
The trade data out of China looked positive on the surface with the strong positive headline figure, but a look at the internals is more than a bit worrying, as imports continue to drop sharply, with the last four monthly figures all steeply negative on year-on-year comparisons.
The Reserve Bank of Australia monetary policy statement overnight was a mixed bag, with forward guidance on policy quite soft, as it clearly left the door open for further rate cuts. “The board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand.” Meanwhile, the language on the economy was fairly stark and negative. It is surprising to see Australian short-term rates largely unaffected by this statement, and AUD likewise failed to do much after the statement’s release, keeping AUDUSD traders biting their nails in the zone of uncertainty between 0.7800 and 0.8000.
Nonfarm Payrolls, but also Average Hourly Earnings
It’s important to emphasize that the Average Hourly Earnings figures have nearly equal status with the change in payrolls data for moving the needle on Fed expectations, provided the payrolls growth is at least close to expectations (currently at around +225k, though the latest market action suggests the market leaning on a stronger number).
In other words, in line payrolls with an exceptionally strong earnings growth number (for example +2.5% year-on-year or even 2.4%, as the highest reading since 2009 has only been 2.3%) might generate a stronger reaction than a +300k payrolls, with slightly softer than expected earnings growth.
Of course, a weak payrolls number with weak earnings growth will be a strong disappointment and likely see the USD challenging recent lows, though I suspect the odds lean on at least an in-line number or better.
The G-10 rundown
USD: All about payrolls and whether a strong report can move the needle on Fed expectations. If EURUSD sell-off set in motion, the focus will quickly shift to the critical 1.1000/50 zone next week.
EUR: It appears with perfect hindsight that some of the euro squeeze was also about EURGBP squeezing higher into the election, as the action there has been the most dramatic, as this pair is the main proxy for expressing the implications of the election results. The euro looks very tired suddenly, and may only resume its squeeze if we see an exceptionally bad US jobs report today.
JPY: USDJPY at 120.00 in play today and we can’t help wonder whether this pair can come alive in a big way on an exceptionally strong US jobs report. We’ll need to see a break above the 121.50/122.00 zone to know.
GBP: An explosion higher on the election results, but we’ve underlined the longer-term structural issues for the UK. EURGBP may be able to progress lower for a time if UK numbers continue to roll in on the strong side, but GBPUSD upside may be very limited – with today’s US payrolls telling us whether we have already seen the post-election high.
CHF: Significant bounce in USDCHF and EURCHF tried to reverse back higher yesterday, but watching payrolls for USDCHF reaction and watching Swiss CPI this morning and a couple of Swiss National Bank speakers out today, including chairman Thomas Jordan himself in the afternoon.
AUD: Market taking a surprising benign/complacent stance of what I saw as a relatively downbeat RBA monetary policy report today. AUDUSD is in maximum uncertainty range and will be highly reactive to the US jobs report.
CAD: A sharp sell-off in oil prices putting downside pressure on CAD, though this pair will see maximum volatility potential as both Canada and US release their respective jobs numbers today at the same time. 1.2200 is an upside hurdle, followed by the 1.2350/1.2400 zone, while 1.1950/1.2000 is the critical downside support zone.
NZD: AUDNZD not far from its 200-day moving average (around 1.0715) as we watch for whether the US jobs reports takes NZDUSD down through the 0.7450/0.7400 area that is the last support area ahead of the sub-0.7200 lows for the cycle.
SEK: Market refusing to take a view here, so we will do the same for now, awaiting a range-break above 9.42 or below 9.22 – looking a bit heavier under the general pressure on EUR cross this morning.
NOK: Opposing forces creating confusion as the Norges Bank was NOK supportive, while yesterday’s crude oil sell-off is a severe headwind. In the coming days, the risk may lean toward a reassessment of the reaction to Norges Bank (and toward NOK weakness).
Economic Data Highlights
- China Apr. Trade Balance out at +$34.13B vs. +$39.6B expected and vs. +$3.08B in Mar.
- Switzerland Apr. Unemployment Rate rose to 3.3% (seasonally adjusted) as expected and vs. 3.2% in Mar.
- Germany Mar. Trade Balance out at +23.0B vs. +20.B expected and vs. +19.5B in Feb.
- Germany Mar. Industrial Production out at -0.5% MoM and +0.1% YoY vs. +0.4%/+0.5% expected, respectively and vs. +0.2% YoY in Feb.
Upcoming Economic Calendar Highlights (all times GMT)
- Switzerland Apr. CPI (0715)
- Norway Mar. Industrial Product Manufacturing (0800)
- UK Mar. Visible Trade Balance (0830)
- Norway Norges Bank’s Olsen to Speak (0900)
- Switzerland SNB’s Moser to Speak (0900)
- Canada Apr. Housing Starts (1215)
- Eurozone ECB’s Constancio to Speak (1230)
- US Apr. Change in Nonfarm Payrolls (1230)
- US Apr. Unemployment Rate (1230)
- US Apr. Average Hourly Earnings and Average Weekly Hours (1230)
- Canada Unemployment Rate and Net Change in Employment (1230)
- US Fed’s Dudley to Speak (1345)
- Switzerland SNB President Jordan to Speak (1515)