The headline US jobs report was again much weaker than expected with a 194,000 increase in payrolls.

The headline US jobs report was again much weaker than expected with a 194,000 increase in payrolls, although underlying components were stronger. There were still expectations that the Fed would pushed ahead with a tapering of bond purchases this year.

US bond yields registered a significant net increase to 4-month highs. Overall risk appetite was still cautious amid increased inflation concerns. Wall Street equities edged lower while Asian bourses were mixed.

The dollar initially dipped lower before regaining ground as higher yields provided support. USD/JPY surged to 34-month highs around 112.70. Sterling was protected by further speculation over a near-term interest rate hike with GBP/EUR again testing 1.1800.

Stronger than expected jobs data and high oil prices boosted the Canadian dollar. An easing of coronavirus restrictions supported the Australian dollar.

US non-farm payrolls increased 194,000 for September, substantially below consensus forecasts of around 500,000, although the August increase was revised higher to 366,000 from the original figure of 235,000. Private payrolls increased 317,000 for the month with an increase of 26,000 for manufacturing employment. There was a firm rebound in retail jobs of 56,000 for the month while other services-sectors were broadly subdued. Government jobs reported a sharp decline of over 120,000 on the month. The unemployment rate, however, declined sharply to 4.8% from 5.2% and below consensus forecasts of 5.1% as the household survey indicated strong employment gains. Average earnings increased 0.6% on the month with an annual increase of 4.6% from 4.0% previously.

The dollar dipped lower in an initial response to the data and there was choppy trading during the session. The larger than expected decline in unemployment and strong household survey maintained expectations of Fed tapering which limited potential dollar selling and EUR/USD settled around 1.1570.

CFTC data recorded the largest net long dollar position since June 2019 while there was a further sharp reversal in Euro positioning with a short contracts of over 22,000, the largest short position since March 2020. The sharp shift in positioning will maintain the risk of a sharp dollar retreat if US confidence slides.

US bond markets will be closed for a holiday on Monday which will dampen activity, but the dollar overall was close to 14-month highs with EUR/USD around 1.1575.

US Treasuries rallied immediately after the US jobs data with longer-term yields moving lower which pushed USD/JPY lower as it tested 111.50 against the yen. Bonds, however, quickly reversed direction with yields increasing to fresh 4-month highs which helped underpin the US currency and there was a fresh USD/JPY move to target the 112.0 area as the yen lost ground on the crosses.  US yields continued to move higher into the New York close with USD/JPY advancing to the 122.20 area.

There was little net change in CFTC positioning in the latest week, maintaining the potential for a squeeze on short yen positions if US yields decline.

San Francisco Fed President Daly stated that the pandemic was pushing prices higher, but the impact should fade.

The Chinese yuan strengthened in Asia with the trade-weighted index at the highest level since early 2016 despite further uncertainty over the Evergrande situation. The main focus was on a further surge in oil prices as WTI posted a fresh 6-year high. US bond yields remained at higher levels which maintained underlying dollar support and the yen dipped sharply. USD/JPY strengthened to 34-month highs around 112.70 with EUR/JPY strengthening to 130.40.

Markets continued to monitor energy-market developments closely given expectations that higher energy costs would undermine the growth outlook as well as putting upward pressure on inflation. Sterling continued to gain an element of support from higher yields, especially with expectations that the Bank of England will be forced to raise interest rates to control inflation expectations. Two-year bond yields increased to the highest level since February 2020 which helped underpin the currency and offset the impact of higher US yields. GBP/USD settled just above the 1.3600 level with EUR/GBP securing a net recovery to the 0.8500 level.

CFTC data recorded a sharp shift in short positions with 20,000 short contracts compared with a small long position the previous week and the second-highest short position this year which suggests that international confidence had dipped sharply.

Over the weekend, Bank of England MPC member Saunders stated that markets were correct in pricing in a much earlier interest rate increase due to inflationary pressures and his comments overall suggested that rates could certainly be debated within the central bank. Governor Bailey added that he was concerned with inflation above target, reinforcing speculation over a near-term tightening and higher yields.

Economic Calendar

09:00Industrial Output YY WDA(AUG)5.40%7.00%
09:00Industrial Output MM SA(AUG)0.10%0.80%
13:00ECB Lane speech
22:45NZD Electronic Card Retail Sales (Y/Y)(SEP 01)-11.40%
22:45NZD Electronic Card Retail Sales (M/M)(SEP 01)-19.80%

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.