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Can an improving US labour market save USD?


Can an improving US labour market save USD?


The US labour market has performed much better than expected so far this month, as indicated by this and last week’s US weekly jobless claims data.


As a reminder, last week 1.186mln American filed for unemployment insurance, well below expectations for around 1.4mln.


This week, under 1mln Americans filed for unemployment insurance, another beat on expectations for 1.12mln. Moreover, continued claims fell to 15.486mln from 16.1mln, below expectations for a drop to 15.9mln. Put simply, not only did less Americans than expected file for unemployment insurance benefits for the first time this week, but also less Americans than expected continued claiming, having already been taking the doll before this week.


The jobless claims data we have had so far this month is thus painting a much more upbeat than expected picture of the US labour market in August.


As a reminder, the US labour market also performed better than expected in July, adding nearly 1.8mln jobs, against expectations for 1.6mln.


Clearly, there the US labour market is carrying some more momentum at the moment than most had expected… surely this should be USD positive?


Well, the USD bulls might have hoped so, but the USD bears will have rejoiced at today’s market reaction to the stronger than expected US labour market data.


With US data; USD might react in one of two ways;


1) USD is affected only by risk appetite - If the data is good, see risk on in stocks and other assets, and these risk on flows are a negative for safe haven USD, sending it lower. Conversely, if the data is bad, we see risk off, which benefits safe haven USD, sending it higher.


2) USD is affected by a mixture of US economic sentiment and risk appetite - If the data is good, USD might be bought on US economic optimism, but sold given risk on flows, leading to a choppy/neutral reaction. Conversely, if the data is bad, risk of flows will be triggered, helping USD, but a decrease in US economic optimism will hurt USD, leading to a choppy/neutral reaction.


It appears that the former has been the case today; put simply, we saw a risk on reaction (US equities powered back to close to highs of the week, putting the S&P 500 back to just beneath all-time highs set back in February) and the haven outflows out of assets such as USD have overpowered any support the currency got from increased optimism over the US economy.


If USD continues to react to US data like this, then my answer to the title is NO, only some combination of trade tensions, a drastic improvement in the Covid-19 outbreak in the US combined with a significant worsening of the outbreak elsewhere could.


But the was markets react to data evolves over time in line with changing investor psychology. USD is still nicely above recent lows around 92.50, even if it is now slightly below 93.00. Maybe if it returns to these lows, investors might see a bargain, in that the US economy is actually performing better and the Covid-19 outbreak isn’t so bad compared to when we were last at these levels. 

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