Wednesday, November 25, 2015

US: Deep impact of NFP on asset prices - BofAML

FXStreet (Delhi) – Research Team at BofAML, suggests that with the much-anticipated 16 December FOMC meeting around the corner, the 4 December US non-farm payrolls (NFP) is one of the most important remaining data points and the significance of recent NFP surprises in driving asset prices has been increasing since summer 2014 and is near historical highs.

Key Quotes

“During the previous hiking cycle the importance of NFP surprises rose ahead of the first hike and continued to rise until the end of the hiking cycle. Despite high anticipation for the next Fed hike, the importance of the employment report could remain elevated even after the initial liftoff. This relationship is particularly pronounced now as the Fed has adopted a data-dependent stance, and each NFP report will likely continue to play a key role in informing the path of subsequent Fed policy decisions.

Equity divergence from rates and FX: In past hiking cycles, financial assets all became more correlated to NFP surprises heading into the initial hike as the market began anticipating Fed policy changes. Currently, the importance of NFP surprises is elevated for USD pairs and rates, but low for equities. This is an important divergence from the previous hiking cycle when all three asset classes exhibited consistent reactions to NFP surprises.

As a contrarian trade, we favor buying a EURUSD 3m 1.10 call with a 16Dec window at 1.1050 as a hedge against a potential Fed policy mistake.

US rates strongly correlated to NFP: Treasury yields have historically been more correlated to NFP surprises than either FX or equities. Perhaps this is because bond investors are more sensitive to potential changes to Fed policy and therefore react faster. However, the current sensitivity for FX currently rivals that of bonds, which highlights the FX market focus on central bank divergence.”
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