Another interesting observation from the HSBC Currency Outlook (10 May, 2007):
Payrolls losing its shock value
One of the big economic events used to be the US employment report. It was the release that shook the markets. A strong release and the market would buy the USD regardless of the economic circumstances of the counterparty currency and a weak release and we would see wholesale selling of the USD. This often saw the USD trade in its most homogenous form. However, over the last six months the employment report has not shown much in the way of surprises. The USD may now be trading less like a homogenous block, because the absolute signal to buy or sell the USD is no longer as strong. Chart 5 shows the absolute errors to the payroll data and here we show that there has not been an outsized error since late 2004, while the 6 month moving average of the errors is also trending much lower.
Although this may help to explain the fall in volatility, it is hard to believe that the US economy has become more predictable. However, it should mean the USD should trade in a less uniform and a more random fashion.
While commentators have recently voiced concern that the payrolls is replete with errors and that the data should be afforded less attention by traders, I don’t believe the trading community has suddenly decided to agree with this view. Along with HSBC, I also don’t believe that the economists have suddenly gotten more accurate and the world has become a more predictable place. Instead, I view the the clump of low forecast deviations as an interesting but random occurrence.
Where I don’t agree with HSBC is on the very last point, that increased certainty should lead a more random USD. Surely, they’ve got their words mixed up there?