There is a widely held belief that the market is apt to dismiss a weak US employment report as hurricane distorted, while responding more to strong September data. This is however a sufficiently wide held belief that it is apt to have reduced the market impact from strong data as well.

Taking this into consideration, the danger is that the market response is quite muted to the September payroll numbers, leaving the market to get back to trading the macro stories that were dominating before the release, like the probability of a US fiscal stimulus and the next Fed Chair. Fortunately for those that like volatility, these themes have already left their mark in terms of a positive USD technical bias, so even a small payrolls nudge in this stronger USD direction could result in sizable multi-day moves.

For currency markets, the most recent story has been the return of a very strong FX correlation with US rates, both at the short and long-end. As examples, the 1m daily correlation with the US 2yr yield for USD pairs, using simple levels data, includes: JPY (0.98); ZAR (0.96); CNY (0.95); AUD (0.85); CAD (0.84); EUR (0.79); and, GBP (0.48). The correlations with US 10y yields are pretty similar. What this is telling us is the FX market sensitivity to the Fed is back at traditionally high levels after a prolonged lull, as the US fiscal story and the Fed personnel stories combine. As such, the FX market should be able to take its cue firmly off both the front-end, and probably even more reliably back-end of the US yield curve. In terms of betas, a 10bp move on the 10y is worth close to 2.5 big figures on USD/JPY and 1.2 big figures on EUR/USD.

USD/JPY high interest rate beta makes it the most logical place to play US rate sensitive moves, and this is true for any data that leads to a meltdown in US yields. However, if strong data plays to higher US rates, USD/JPY looks to be struggling near the top of its recent range, and there are other much more vulnerable pairs to trade, where s/t positioning will more readily encourage the move, notably on all of AUD, Kiwi, CAD and GBP.

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The Thursday close for all these currencies versus the USD looks distinctly vulnerable to stronger US data. To pick some possible technical targets, AUD/USD to end June peak at 0.7712; Kiwi to the April 0.7050 level; CAD to end Aug 1.2663; and GBP back to the 1.3000 round figure fit with solid US data and stronger USD themes.

In sum, on weak data some small JPY and EUR bounce can be expected, while on stronger data, all the Anglos look vulnerable for bigger multi-day moves.

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