Jobs and JPY

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The labor supply argument becomes less convincing if Claims roof.

by Brent Donnelly

August 1, 2024

https://www.sahilbloom.com/newsletter/the-ever-changing-you

Current Views

Short CHFJPY 171.86

Stop loss 173.65

Claims

USDJPY is a complete mess as it made a new low, by a huge margin, and is now roaring back. GBPUSD, meanwhile, is rebounding too as the Bank of England delivered the most hawkish possible rate cut one could imagine. And stocks have come a good way back after an eye-watering selloff.

We have entered the sell zone for CHFJPY and the limit order I put in Current Views yesterday just got done. I am nervous about Swiss CPI tomorrow, but I also think that we are getting low enough in EURCHF that there is a rising probability of SNB smoothing intervention, so those two things balance out.

Meanwhile, Initial Claims are making it slightly harder to argue that the rise in the Unemployment Rate is only about the supply of labor. Yes, the UR is heavily influenced by labor supply and can rise in a good jobs market if new workers come in, but Initial Claims is more about labor demand and people losing their jobs. The issue is always that Initial Claims is timely, but noisy, while the Unemployment Rate tends to lag, but it’s smoother.

If you look at the chart (with 2020 truncated by compressing the y-axis), you can see the tremendous noise in Claims. But you can also see that we are slowly moving away from the benign levels consistent with the 2018 and 2019 equilibrium.

The 2018/2019 average for Initial Claims was 220k and the average Unemployment Rate was 3.8%. We are kind of far off those levels now. Unlike the confounding spike in Claims in mid-2023, this move looks more consistent with a meaningful slowing of labor market momentum. Rising claims, falling ADP, general trend, and autocorrelation all suggest playing for weak NFP tomorrow.

As mentioned yesterday, 152.00 is now the big resistance in USDJPY and if you’re with me on NFP, it makes sense to sell USDJPY today 151.50/90. This squeeze is pretty epic but given the hugeness of the tech level and the lean on NFP, this could be a beautiful setup. The red line is 152 and the yellow circles are all the encounters where USDJPY was rejected by that level. We held it strongly pre-BOJ and then broke it cleanly post-BOJ.

Final Thoughts

This month’s FX Volumes report from CLS includes a couple of good charts. First, just for your info, here are the daily spot volumes, by time of day. The intraday volume pattern is extremely consistent, and this chart pretty much matches the one from my book The Art of Currency Trading (published in 2019). This is a reliable pattern.

Second, this chart of spot volumes, by currency pair, in June 2024 gives you an idea of the relative importance of each pair. USDMXN at number 7, just behind USDCHF.