A weaker labor market means a weaker USD
Kevin Warsh's entry into the Fed was truly strong, and, paraphrasing the classic, he stood as a hawk at the head of hawks. Although at the bankers' meeting in Sintra Warsh began to soften that strong message a bit (inflation expectations are falling, etc.), the signal remains clear: no guidance for markets from the Reserve chief. Investors should focus on macro data and build their expectations of the monetary path through them.
Investors listened, looked at yesterday's U.S. labor market readings (maximum employment is, besides inflation, the Fed's second main mandate) and decided to quickly reduce their USD positions.
This happened not only because the releases themselves were weaker than forecasts (employment change +57k instead of +114k), but also (slowly becoming classic) historical data were heavily revised downwards (e.g., May NFP from 172k to 129k). I am personally becoming more critical of the U.S. way of collecting and publishing macro data, because a hostile party could say it increasingly looks like misleading investors.
Nevertheless, the last ones were forced to quickly adjust their stance on U.S. rate hikes and thus from the possible two moves to the beginning of next year only one remained for the fall. The effect of this repositioning was immediately seen in forex, where the USD had to give up part of its June gains.
The EUR/USD rate rose toward 1.145$, briefly corrected, and then on Friday afternoon balances at that level (highest in 2 weeks). This translated into a dollar rate falling to about 3.74 PLN with a stable euro rate above 4.28 PLN.
At this point I must point out that the Thursday USD weakness began even before the key macro data, and the culprit was… JPY?
What's happening with the JPY?
On Thursday morning forex charts began sharp moves. Analysts and dealers feverishly checked reports, dispatches, and social media. Their gaze finally turned to the (this time) Far East. All because crumbs started leading to Japan and the yen. Earlier the Japanese currency was under the greatest pressure since the 80s, and the USD/JPY rate already glanced at 163¥. Suddenly a market reversal and a rapid strengthening of the yen, so USD/JPY breached 161¥, the lowest since mid‑June.
Immediately speculation arose whether Japanese authorities had again intervened in the currency market. The last attempt cost them a non‑trivial 74 bn USD and produced only a temporary effect, but speculators had feared such a move for some time. Nevertheless, confirmation of hard intervention is still lacking, but accidentally leaks appeared in the media.
They indicate that the Japanese are giving up on "warnings" directed to the market about possible interventions and at the same time will not indicate the levels they want to defend for the JPY. This means, more or less, that they give themselves much greater flexibility in conducting such operations.
This message triggered justified concerns among investors, especially in the face of a long U.S. weekend (Americans began celebrating Independence Day today). Without jankes the market is much flatter, which should make any real currency intervention more effective. For now, the narrative about correcting positions on the yen was enough, but Monday will show whether actions followed it.
Services bounce off the bottom but are not yet happy
European PMI indicators once again bring a mixed picture, although one remains current: in services sentiment is worse than in industry. On Friday we learned the managers' stance from the services sector. Only Italians came above the 50‑point threshold (50.2 points), which separates recession from expansion, but they still did not meet expectations.
Germany presented a much better result than forecasts (and slightly better than the previous release), but the result was still only 48.6 points. The French can only dream of such a result, having risen perhaps from the May trough (44.3 points), but they still did not meet consensus, showing only 46.8 points.
Ultimately the result for the entire euro zone bounced to 49.4 points, i.e. exceeded expectations but remained in the negative zone. The main hope for better performance remains the resolution of the conflict in the Middle East, which brings energy commodity prices down and distances the prospect of further rate hikes by the ECB.
