G10 FX to NFP surprise reactions – Nomura

FXStreet (Delhi) – Research Team at Nomura, notes that during the pervasive risk-off sentiment in the first two weeks of 2016, it was no surprise that FX reactions to January’s NFP at first glance were less clear than reactions in the latter half of 2015, especially considering the USD sold off after a +92K NFP headline surprise for January (+292K vs +200K consensus).

Key Quotes

“This is not the full story, January had some mixed surprises

While the January NFP release was a positive +92K surprise, average hourly earnings wages were on the weak side (y-o-y +2.5% versus +2.7% expected), and the USD therefore finished the day lower as a result.

Keep your eye on wage developments for determining the USD reaction

The markets’ focus therefore looks to be more on the developments in wages rather than the headline NFP change. One could argue that the reaction to January’s NFP was a “one-off”, but this looks to have been reflected quite well in the sensitivity analysis between FX to NFP headline and FX to average Hourly wages.

It appears that wages are the dominant driver of USD reactions over NFP, with EUR the market’s NFP proxy currency of choice, followed by JPY and commodity currencies not far behind.

A divergence worth noting: GBP and CAD reactions (or the lack of) stand out

The lack of a reaction in GBP and CAD stands out in our analysis. The small response in CAD can be partly explained by the fact that the Canadian employment report tends to come out at the same time as the US NFP and that the countries’ economies are well linked. The low Beta in GBP can be explained by the view that the BoE would closely follow the Fed in terms of hiking. However, now that market pricing for BoE hiking this year is non-existent, perhaps the GBP may react more to NFP numbers than it has done in the past year.

Nevertheless, the analysis shows NFP surprises remain highly important for G10 FX reactions, where the devil is in the details of wage surprises versus the headline number to determine where the USD ends up.”

Research Team at Nomura, notes that during the pervasive risk-off sentiment in the first two weeks of 2016, it was no surprise that FX reactions to January’s NFP at first glance were less clear than reactions in the latter half of 2015, especially considering the USD sold off after a +92K NFP headline surprise for January (+292K vs +200K consensus).

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