USD/JPY: the king dollar trade and bond market selloff isn’t over just yet

• Bond futures traders wagers (open interest) hit record high; Bets are calling for a hike at November 1st meeting
• US jobless claims edge higher but still remain historically low levels
• Fed’s Daly noted they can hold rates steady if labor, prices keep cooling

The dollar is softening and stocks are slightly lower as calm emerges in the bond market. ​ Wall Street is still seeing a lot of strength in the labor market. The S&P 500 index turned negative after slightly lower-than-expected weekly jobless claims. The risk for higher rates remains as a labor market slowdown was supposed to happen before the holiday hiring season. The dollar rally is taking a break before NFP Friday, as broad modest weakness emerges.

Positioning ahead of tomorrow’s NFP report will likely be limited given it seems most leading indicators suggest job growth will remain healthy, which should keep the bond market selloff going strong. A strong headline number will likely be expected given we only saw the ADP private payroll miss. ​ Eventually the surging cost of capital will support a softening of the labor market, but it doesn’t seem like that will be reflected in tomorrow’s report.

As companies are getting ready to show their books to investors next week, in the quarterly ritual known as earnings season, traders want to know if third quarter results come in as good as the first half of the year. ​ The banks kickoff earnings at the end of next week and it seems many are expecting the financials to highlight a much weaker consumer given surging delinquencies and exhausted excess savings. ​ Pessimism for the consumer won’t be going away anytime soon and that is probably why stocks are selling off today. ​ ​ ​ ​

US Data

The last labor market reading before the NFP report provided another reminder that the labor market is still strong. ​ Worker filings for unemployment benefits held steady at 205,000 in the week ending on September 30^th. ​ The UAW strikes have yet to really impact the data as Michigan saw only 1,282 claims, Ohio had 1,422, and Missouri only had 532. ​ ​ ​ ​

The Challenger, Gray & Christmas report showed planned job cuts fell from a 266% year-over-year pace in August to 58%. ​ ​ Companies announced plans to fill over 590,000 jobs last month, which was up 55% from a year ago.

The US dollar is softer across the board as FX traders reduce positions ahead of a key jobs report. The higher-for-longer trade has mostly been priced in for the dollar against all of its major trading partners. ​ CFTC data shows leveraged funds have ramped up dollar futures contract bets to the best levels since June. ​ Unless we see US job growth fall below 100,000, the king dollar trade might remain in place a little while longer.

USD/JPY 15-minute chart

If the labor market softens, USD/JPY could make a run for the lows made on October 3rd.  A hot labor market report could see prices return above the 149 level.

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