January 2015 Nonfarm Payrolls lift USD

Yesterday the U.S. Bureau of Labor Statistics (BLS) reported that total nonfarm payroll employment increased by 257,000 in January 2015 and that the unemployment rate rose to 5.7% from 5.6%. The market had been expecting an NFP release of roughly 228k, according to a Bloomberg survey of economists. In addition, the BLS revised the November 2014 NFP number to 423k from 353k. The preliminary December 2014 revision stands at 329k versus the original release of 252k. That suggests that more than 1 million jobs may have been added in the nonfarm labour market since October of last year, painting a more optimistic picture for the US labour market.

2014 Revisions in Nonfarm Employment
2014 Revisions in Nonfarm Employment (Source: U.S. Bureau of Labor Statistics)

The increase in the unemployment rate may surprise some analysts considering the strong NFP print, but the change may merely have been a result of a disproportionate 0.2% increase in the labour force participation rate (62.9% after 62.7% in December 2014), which is encouraging given that slightly more people are now looking for opportunities in the improving jobs market.

When the number came out at 1:30pm London time, the USDJPY exchange rate jumped almost instantly to Y119 all the way from Y117.2 and EURUSD fell more than one cent to $1.1311 from $1.1459. Currency traders certainly cannot complain about a lack of volatility in the FX market in January and the first days of February. Intraday swings and the return of lasting price trends have provided many trade opportunities for investors. I still expect EURUSD to trade somewhere between parity and $1.1 by the end of the year. The case is similar for USDJPY with the Bank of Japan still set on printing more money to aid its economy. The strong employment numbers from the United States put a possible first Fed rate hike in mid-2015 back on the table.

New Normal: Strong NFP, weak USD

According to today's NFP release, 288k jobs were added in April, a lot more than the Bloomberg consensus forecast of 218k. In addition, the March number was revised upwards and the unemployment rate declined to 6.3%. Still, USD strength was only temporary with volatile price action immediately after the release and profit-taking in the hour that followed. For example, USDJPY soared up to 103 but quickly fell back to earlier intraday levels in the 102.30/.50 range:

USDJPY Tick Chart 02 May 2014

Decreasing volatility is still a hot topic for USD pairs. After a few swings on Wednesday, EURUSD 1m implied vol is back below the 5% mark, slowly approaching its 2007 low of 4.65%. Central banks, most notably the Fed, have swamped markets with liquidity leading to artificial USD weakness but also purchases of European equities, which arguably continue to support the EUR.

Speaking of equities, the NFP release was also notable because the S&P 500 mini-future <ESA Index> actually fell after traders realized that this was in fact positive news, which, in today's perverted market can only mean negative news for equities. After all, chances are that the Fed will continue tapering if the economy does relatively well. Bad for equities, right? Following this erratic ESA move, prices recovered (see chart), apparently supported by disappointing NY ISM data and a lower-than-expected 1.1% MoM change in new factory orders. As of this writing, however, the SPX is trading relatively unchanged around 1,880, rendering today's data releases a factual non-event. In the meantime, the VIX is slowly approaching the 10% level. Back to (the new?) normal.

ESA Index 30m 02 May 2014