As the trading week begins, traders are noticing that something has changed. Yes, it's quiet; yes, the Dow is higher; but markets, for now, have seen correlation regimes 'change' since the payrolls print struck on Friday - Stocks are flat, Bonds are down, but the dollar is up...big time. While former fund manager Richard Breslow notes that volumes are running well below normal this morning, and there’s always a danger in reading too much of anything into events when activity and news are so subdued, it’s worth asking the question whether Friday’s non-farm payroll number and subsequent price action has changed anything. His answer - "no and yes."
No, because none of the issues pressuring the dollar, and keeping rates subdued have been resolved.
On the other hand, yes, because this is the first time since these latest moves became impulsive, that dollar sellers got hurt.
Unlike the famous Mike Tyson quotation, once traders get punched in the mouth they realize that they now need a plan. The path of least resistance suddenly isn’t completely painless.
We always knew, or should have, that it would be heavy going the whole way from 1.19 through 1.20 for EUR/USD. But while the resistance was respected all of last week, it didn’t seem to daunt traders who kept nibbling near the highs. Don’t forget, we went into NFP at 1.1880. Which didn’t leave much margin for error. So now, in addition to multiple historic data pointing to this area as technical resistance, we have renewed proof.
Investors and, I suspect, reserve managers continue feeling better about the euro zone and skeptical about the U.S..
Of late that’s been a winning bet. It’s important, though, to keep updating your observations. There’s a lot of subjectivity to that assessment and it needs to be constantly questioned. If the utter non-reaction to today’s weak industrial production report from Germany is anything to go by, the euro is so far still being given the benefit of any doubt.
One data miss just doesn’t take precedence over debt ceiling concerns. But perceptions, like economies, move in cycles.
This latest move has had an element of weak dollar to it, but also strong euro. The key to trading going forward will be to inform your EUR/USD view by how the shared currency does against its other crosses. If those moves begin to run out of steam, become cautious. I’m watching to see if EUR/CHF can comfortably stay above 1.14 and EUR/JPY above 129. If these levels don’t hold then we’re likely back to a period of two-way action.
Aside from that, listen for any signs of ECB pushback on currency strength. I’d be surprised. Also keep an eye on how Jackson Hole begins to get handicapped as it becomes more imminent. And don’t assume Friday’s CPI is guaranteed to be more of the same.