USD: Decoupling from data another sign of lost investment currency status - ING

Viraj Patel, Research Analyst at ING, suggests that the rules of the game for trading the US jobs report are set to change in 2018 and as a general rule of thumb when assessing US data over the coming year, one should really be looking for any evidence that would cause a reassessment of the Fed's current structural view of the economy – which in turn could warrant a potential change to the central bank's future expected policy path.

Key Quotes

“In the case of the US jobs report, investors looking for the Fed to deliver 3 or 4 hikes in 2018 should get used to the idea that the pace of job gains will slow over the coming year in a tight labour market. In an ideal Phillips curve world, confirmation of a tight labour market would be met with higher wage inflation. The latter holds the key to US bond markets in 2018; while Fed hawks – and those that believe the Phillips curve isn’t flat but just dormant – may be willing to tolerate some slowdown in the pace of jobs gains in the near-term, the absence of a material and sustained pick-up in wage growth would in our view seriously question the Fed’s doggedness to stick to old theories that has little evidential basis.”

“As for today’s report, our economists are looking for +170k gain in payrolls and 2.5% YoY average hourly earnings. Such a scenario is unlikely to jolt markets – although above-consensus job gains and limited inflationary signs would be a goldilocks outcome for risky assets. Moreover, we note that the dollar has de-coupled from positive US data surprises in recent months– an added sign that it has lost its status as an investment currency, with negative structural factors and political risks playing a greater driving role. The latter two forces are set to persist over 2018 and therefore fading any post-NFP dollar rally remains our preferred tact. Look for the DXY index to stabilise in the 91.50-92.50 range.”