Investing.com – All eyes in the foreign exchange markets are on Friday’s U.S. jobs report, with Citigroup saying the report is likely to impact the G10 FX market, and the U.S. dollar in particular.
Since last month’s labor market report in early August, the market’s reaction to the data has been asymmetric for the US dollar: better-than-expected data has been relatively neutral for the US dollar, while data misses have seen sharper and broader weakness in the US dollar, a Citi analyst said in a note dated September 3.
However, from the bank’s perspective, August was largely driven by positions, which have now shifted from buying the US dollar to selling it, and focusing only on the US side of the growth story.
“We continue to stress that the growth backdrop in the rest of the world remains worrisome, particularly for industrialized countries (such as Germany and China). We also have a Fed that is more accommodative than it was a month or two ago,” Citigroup added. “So we expect the US dollar’s reaction function to be somewhat different going forward compared to recent months.”
Citigroup said the market could enter a period of greater FX dispersion, with lower risk due to growth concerns leading to the US dollar underperforming against low-beta FX currencies but outperforming against higher-beta FX currencies.
Therefore, a reading in line with Citi’s expectations – 4.3% and 125K – would see a decline, but not necessarily broader weakness in the US dollar.
“A more ambiguous reading could shift attention to the Fed speech later, where the market could face a precipitous sell-off in the US dollar if Fed Chair Waller fails to deliver gains. A strong reading could accelerate any short-covering of the US dollar from the leveraged tranche, potentially underperforming the Japanese yen and Swiss franc,” according to Citigroup data.