NFP to encourage expectations for Fed tightening, keeping USD in resilient form – TDS

FX

Nonfarm Payrolls disappointed, but the labor market tightness indicators were stronger than expected. The employment numbers had a modest impact on the FX market. Looking ahead, economists at TD Securities think the bar is very high to undermine the USD, especially as the Fed is very determined to move out of very accommodative policy settings.

Risk of earlier QT to cause yen underperformance

“We do not think that the disappointment in headline payrolls will do much to undermine the USD. The Fed is on a mission to move into restrictive policy; taper is almost over, lift-off is happening, inflation is very high with evidence of second round price pressures, and QT is all the rage. And, despite the back-up in yields this week, financial conditions remain accommodative especially relative to the growth and inflation backdrop.”

“We are not putting much stock on Omicron to sway sentiment in risk or FX, and consequently, we think the Fed’s determination should keep the USD in resilient form.” 

“USD/JPY is the best FX expression of Fed policy given it is just a mirror image of the Fed funds futures. Ultimately, we remain biased to USD/JPY topside with an eye to 118/19 in the coming weeks and months, as further acknowledgement of QT should reinforce duration supply and higher 10y real yields.”

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