EURUSD reaction to jobs data highlights regime shift in FX
The dollar surged to a fresh 16-month high against the euro on Friday after US non-farm payrolls came in better than expected in December, confirming a regime shift in the relationship between FX moves and risk.
Adding to a recent run of improving economic data from the US, figures showed the US economy added 200,000 jobs outside the agricultural sector last month, better than the consensus estimates for an increase of 150,000. US unemployment also beat expectations, dropping to 8.5% and confounding expectations for a reading of 8.7%. There was further encouraging news as aggregate hours worked, which correlate strongly with GDP growth, rose at an annualised 3% in the three months to December.
“With most of Europe’s economies cratering, the world economy is incredibly fortunate that the largest one, the United States, is showing some real resilience,” says Michael Derks, chief strategist at FxPro.
“For the dollar, it represents a further fillip, at a time when investors and traders continue to abandon the euro.”
The reaction to the figures confirmed the recent regime shift in the FX market, which has seen the euro lose its positive correlation to risky assets.
As stock markets rallied, EURUSD plunged to a low below $1.2730, its weakest level since September 2010.
For most of last year, EURUSD displayed a positive correlation to risky assets as rising risk appetite pushed investors away from the dollar. However, sparked by the ECB’s move to loosen monetary policy and increasing concerns over the eurozone debt crisis, that relationship has broken down.
Jens Nordvig, global head of G10 FX strategy, said it was now worth establishing exposure, targeting a move to $1.20 in EURUSD in the next few months.
He said, consistent with recent US data, the jobs report looked solid and, relative to the continued weakness in the eurozone, US growth momentum appeared impressive. Adding to his conviction for a lower EURUSD were capital flows, with the first signs emerging that equity repatriation in the eurozone was waning and potentially flipping to outflows.
Repatriation by eurozone equity investors appears to be waning
Nordvig said that although it was too early to enter a spot position, an option position made sense given that downside option structures in EURUSD had cheapened vastly during the last few months, as books had been cleaned up into the year-end and as risky assets globally had stabilised. Implied vol on the three-month 25-delta EUR put/USD call has come down from a peak of around 20% on September 22, to around 15.3% now, for example.
“Against this background, we now think two-month EURUSD $1.20 one-touches offer value at around 28%,” said Nordvig.
“In our own assessment, there is a 60% to 70% likelihood that we trade to 1.20 within a two-month horizon. We are investing $280,000 premium for a max pay-out of $1 million.”