USD/JPY, AUD/USD: Beware backing the buck on volatile jobless claims data

• USD gained on Wednesday, helped by a surprise fall in weekly jobless claims
• Claims data is notoriously volatile in weeks bordering public holidays, such as Thanksgiving
• US 2-year yields rose strongly on the data but have started to reverse. FX pairs such as USD/JPY have not.

An unusually large market reaction to volatile second tier US economic data ahead has boosted the US dollar ahead of Thanksgiving, seeing USD/JPY and AUD/USD reserve part of their early week moves. But whether it is justified is contentious, suggesting there may be grounds to fade given it comes across as noise rather than signal.

Jobless claims notoriously volatile around holidays

Close observers would know volatility across the US yield curve has been particularly elevated in 2023, but that seen over the past 24 hours really takes the case. US 2-year Treasury yields – which are sensitive to shifts in expectations towards the Fed funds rate outlook – surged 9 basis points within the space of hours, coinciding with a surprise decline in US initial jobless claims and data showing near-term inflation expectations were a tenth higher than originally reported in Uni of Michigan October consumer sentiment survey.

US 2-year Treasury Note Yield. Source: Refinitiv 

While some clearly took the reports on face value, those who follow the claims data closely would know the weekly figures are often volatile around holiday periods, such as Thanksgiving. The 209,000 print was below even the lowest forecast provided to Bloomberg, and completely against the prevailing trend. Unusual, in short.

If it looks like a duck, quacks like a duck then it probably is a duck. Or, in the case of the latest claims data, probably an outlier at risk of being reversed as soon as next week. And if that is the case, it’s a fair bet so too will the hawkish interpretation of the data.

USD/JPY up more than 200 pips in two days

With US two-year yields sharply higher on the back of the data, the largest reaction in FX markets was in USD/JPY, a pair often driven by shifts in rate differentials. Having fallen sharply earlier in the week, belatedly reacting to a decline in yield differentials beforehand, USD/JPY has subsequently rallied over 200pips in two days, including nearly 100 following the US economic data. Given the speed of the move and the fact 2-year yields are already retracing a touch, it suggests downside risks may be emerging in the pair. For those considering short trades targeting a move back to 148.80 support, a stop above either above 148.85 or 150 would offer protection against a continuation of the rebound.

AUD/USD offers opportunity for fresh longs

Like USD/JPY, AUD/USD is another pair impacted by the bounce in US yields and dollar, seeing it decline from more than three-month highs earlier in the week. However, with short-dated US yields starting to ease again, and with AUD/USD tagging prior resistance at .6520 before bouncing, it suggests grounds for another probe higher may be building. Those considering longs could place a stop below .6520 for protection, targeting a push towards .6580 and potentially resistance located at .6600.

-- Written by David Scutt

Follow David on Twitter @scutty