Friday's U.S. jobs report is always a big moment for currency markets. This time, traders are buying extra protection ahead of it.
A jobs report counts how many jobs the U.S. added last month and what the unemployment rate did. For currency traders, few data releases carry more weight. The index tracks the dollar against a basket of major currencies.
One-week volatility also climbed Thursday. The window covers both the jobs report and next week's inflation data, so the whole stretch looks uncertain.
Options are contracts that let traders buy protection against a sharp currency move. When demand for that protection jumps, the price jumps with it.
Right now, that insurance is getting more expensive. It is a sign that traders are bracing for a big swing.
The bigger source of uncertainty is a change at the Federal Reserve. Since Kevin Warsh became Fed chair in May, he has stopped telling markets how rates are likely to move, abandoning the approach known as forward guidance.
Without forward guidance, each new data release matters more. "In a world without forward guidance, that means that incoming data is driving things," said Bipan Rai of BMO Asset Management.
"Warsh is still new in the role and the market still isn't clear on how he's framing things or what the Fed's reaction function looks like," Rai added. That is central-bank speak for how the Fed tends to react to fresh numbers, and traders are still guessing.
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Wall Street has had to parse every release on its own and keep bets small. The day before last week's Fed meeting, options pricing implied about a 30% chance that the Fed would raise rates.
That helps explain why Friday's number is such a test. With fewer hints from the Fed, the market has to use each data point to guess what comes next.
Another force pulling on the dollar comes from Tokyo. The yen has been under pressure, and possible new steps to support it add risk to currency markets.
A recent coordinated U.S.-Japan intervention pushed the dollar down against the yen for four straight days.
That losing streak was the worst in about two years, and it shows how quickly sentiment can shift.
When Japan steps in to prop up the yen, it tends to push the dollar lower in the process. That is another reason traders are staying cautious around Friday's report.
CIBC Capital Markets strategist Noah Buffam puts it this way. "For tomorrow's NFP report we think the risks to dollar are asymmetrically to the downside given opportunistic yen-intervention risk and because the Fed will be more inclined to react to a weakening jobs market over a steady one," he said, referring to the payrolls report.
His point: the Fed is more likely to respond to a soft jobs number, and Japan could step in again to support its currency. If both happen at once, the dollar could take a hit.
The jobs report matters beyond trading desks. It tells you whether the job market is still solid.
That feeds into what the Fed does with rates, which touches everything from mortgage costs to the value of the dollar in your wallet.
Economists surveyed by Bloomberg expect July unemployment to hold at 4.2% and hiring to come in at over 80,000 jobs. That points to a labor market that is still in decent shape, even if it is cooler than the hiring boom of the past couple of years.
A steady number would also give the Fed less reason to react quickly. For investors, the takeaway is that the Fed's old road map is gone.
When the central bank stops signaling, data becomes the whole story. That makes Friday's number a bigger deal than usual.
One report will not set the course, though. The next few releases matter just as much.
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