DB FX Daily: London EUR/USD and payrolls

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FX Daily: London
EUR/USD and payrolls
Today's Key Data and Events
USD Non-farm payrolls for May, DB 70k/mkt 132k (12:30 GMT)
USD Core PCE for April, DB 0.1%/mkt 0.2% (12:30 GMT)
USD ISM for May, DB 53.0/mkt 54.0 (14:00 GMT)
USD UoM consumer sentiment for May (final), 88.0 expected (14:00 GMT)

Upcoming Event Risks
June 6: ECB rate decision, RBA rate decision
June 7: Bank of England rate decision
June 14: SNB rate decision

EUR/USD and payrolls - watch for revisions
We argued yesterday that in the absence of some weaker data to get Fed easing decisively back on the agenda, EUR/USD may continue to struggle. Yesterday's US data has pushed the market further toward pricing no change from the Fed, with the strong Chicago PMI more than offsetting a slightly larger than expected downward revision to Q1 GDP (although we acknowledge that EUR/USD managed hold its own over the session). Today looms large as a key data day with the release of payrolls, the core PCE deflator and the ISM - all of which have the potential to drive Fed expectations. Our most recent FX Theme Radar also shows the current importance of monetary policy expectations for FX markets - with changes in yields having become just as important a driver of currencies as the level of yields.

The key release over the coming day is, of course, the non-farm payrolls report. In the first chart below we have compared the move in EUR/USD on the day to the consensus forecast miss, adjusted for the revision to the prior month. (That is, payrolls coming in 30k above consensus expectations, but the prior month being revised down by 30k would leave our adjusted consensus forecast miss at zero.) We have done this because markets appear to pay attention to payrolls revisions. Indeed including the revision to the prior month sees the relationship between the consensus forecast error and the move in EUR/USD on the day tighten up significantly (with the R squared on a simple trend line doubling if prior month revisions are included).

Finally, we also note that the unemployment rate has attracted increasing attention in recent months. The bottom line therefore is that all aspects of the US labour market data due for release today are potentially important for markets.

Low volatility environment supporting yen weakness
At the time of writing USD/JPY had made a three-month high in the New York session. While the move higher on the day was helped along by the strong print on the Chicago PMI, as the second chart below shows USD/JPY tends to perform well in periods of low volatility in FX markets. In fact, our currency volatility index (the DB CVIX) is currently at an all time low. The weakness in JPY and the low volatility across markets has also seen carry crosses such as AUD/JPY and NZD/JPY make new highs.