Category: US Markets

Last Friday’s US Non-Farm Payroll data were unspectacular in the sense that they offered investors little clarity about the likelihood of a rate hike at the FOMC meeting on September 21st. The Headline jobs growth printed at 151,000, which was lower than the consensus 180,000, wage growth slowed to .1% and the unemployment rate was unchanged at 4.9%.

The US Dollar was sold off initially but regained bids mid-session and finished stronger by the holiday shortened NY close. The USD’s resilience in the face of the disappointing jobs data reflects the feeling that the report didn’t alter the FED’s information set, or sway investor sentiment very much for another move to normalize rates either this month or in December.

As a result, the SP 500 posted another firm close above the 30 day moving average at 2172.00, the US 10-yr note yield inched back over 1.60% and the US Dollar index close above recent resistance at 95.50.

In short, over the last two weeks, the primary market drivers have been about the US monetary policy trajectory. First, it was the Jackson Hole confab where the FED leadership all confirmed they were reading from the same “data-dependent” playbook. They all signalled the time was approaching to take another step in the normalization of interest rates, without specifying exactly when. Then, the market focused on the US Jobs report; which FED Vice-Chairman Stanley Fischer had identified as important to the timing of the next move.

With those US-centric events and information absorbed into the market, we believe that this week’s European Central Bank (ECB) policy meeting (and press conference) will be the primary driver for foreign exchange flows.

In addition to the usual discussions about the path of EU monetary policy, this Thursday’s meeting will also include updated staff economic forecasts. Aside from the uncertain political nuances of these staff forecasts, two points are patently clear: the EU economy doesn’t have much forward momentum from Germany and inflation remains well below the 2% target throughout the entire region.

We expect the ECB chief Mario Draghi to take direct aim at these two lingering issues and probably add comments about slowing exports due to the UK decision to leave the EU back in June. Of the additional stimulus measures on the table, the extension of the current Quantitative Easing (QE) program beyond March 2017 appears to be the decision of least resistance.

Other changes to the current asset purchase program include removing the interest rate floor on the securities pool so the ECB could buy assets which yield LESS than -.40% , cutting the ECB deposit rate deeper into to negative territory and expanding the total purchase amount above the current €1.7 trillion. On balance, we feel that there is little political or economic appetite for lowering the ECB base rate deeper into negative territory and that expanding toward a QE3 program is a more likely way of lowering the Euro and supporting EURO zone stock markets.

By the end of the NY trading session on Friday, it turned out to be a great day for the US Dollar. The USD posted gains against all the G-7 currency pairs after FED Chair Janet Yellen’s speech at the Jackson Hole Global Economic Forum. In fact, the EUR/USD, AUD/USD and USD/JPY all posted key reversal price patterns for the week.

Interestingly, though, it wasn’t Ms Yellen’s words which sparked the rally in the Greenback, derailed the early rally in the SP 500 and sent gold to a one month low at 1314.00. But rather, the later clarification of her comments by FED Vice-Chair Stanley Fischer which brought higher US rates back into play.

Ms Yellen’s comment that ” a case for an increase in the federal funds rate has strengthen in recent months” was followed by a sharp rally in Gold and US equities, and a moderate drop in the USD. However, later in the NY session, Mr Fischer was far more explicit when he said Ms Yellen’s comments were consistent with a possible rate hike in September and that two rate hikes this year is still possible.

Throughout last week, there were consistently hawkish statements from US policymakers who all seem to agree that US inflation is on the rise, wages are growing at a consistent pace and the jobs market is close to full employment. Mr Fischer made it clear that this week’s Non-Farm Payroll data would be a crucial component to the FOMC’s decision to further normalize rates on September 21st.

Since the monthly employment figures are among the most significant reports in the monthly data cycle, this may or may not be the case. However, the market took the bait on Mr Fischer’s comments and ramped up the odds of a September rate hike to 42% from 32% the previous day…..which is the highest probability in over a month. On balance, many economists are forecasting the US economy to accelerate  into the end of the year as the Atlanta FED GDP tracker is at 3.4%, and the NY FED tracker at 2.8%.

With the US Payroll data scheduled on Friday, it’s unlikely that financial markets will trade sideways throughout the week. Other market moving data points this week include Australian building approvals on Tuesday, Eurozone PMIs on Wednesday and UK manufacturing PMIs on Thursday.

As a general trading strategy, it’s our base case that the market reaction on Friday illustrates a further widening of the Central Bank divergence theme in which US monetary policy continues to have a tightening bias, while other central banks are increasing fiscal and monetary stimulus. As such, we suggest maintaining a bullish market posture on the US Dollar.

The US Dollar, Treasury markets and global stock indexes all remained within recent ranges as investors eagerly await Fed Chair Janet Yellen’s speech; which some believe could provide clarity on whether US interest rates will rise again this year. Ms Yellen will deliver the keynote address at the global central bank gathering at Jackson Hole, Wyoming at around midnight, Sydney time.

The idea is that she could send a clear signal that the FOMC is gearing up for another rate hike this year, but the likely outcome is that she will maintain her less committed stance that policy transmission trajectory will remain data-dependent and that all policy meetings are “live”.

Taking into account that two other FED leaders, William Dudley and Stanley Fisher, have already expressed their views that interest rate normalization will continue this year, it seems unreasonable to expect that Ms Yellen will substantially stray from the generally upbeat US economic theme. This idea is underscored by the fact that the topic of her speech, “Designing Resilient Monetary Policy  Frameworks for the Future”, really has nothing to do with current policy decisions.

So does this mean that Ms Yellen’s speech will be a non-event? Probably not.

Although a rate hike in September seems unlikely, there is little upside to be gained by Ms Yellen ruling it out. The FED wants investors to believe that every meeting is actionable, even though there is no historical precedent for a move in November; the month of a national election. According to today’s Fed Fund futures, the market has raised the odds of a move in September to 28% from 26% just after the US payroll data on august 5th.

The USD has started the new week with a bid tone after last week’s steady hammering. Looking back to last week, the Greenback reached multi-week lows against the Euro, British Pound, Swiss Franc, Canadian Dollar and the Japanese Yen. On balance the losses averaged around 1.5% but what made the weakness so significant was its relentlessness.

For example, the USD/CAD and USD/JPY did not post one session of gains while the EUR/USD traded higher everyday except Friday.

However, the technical reversal pattern in the USD Index on Thursday and Friday suggests this week could be much better for the USD. The dominate technical pattern in the USD Index has been the retracement from the 91.80 low in early May to the .9760 level posted on July 25th. In this analysis, the 61.8% Fibonacci retracement at 94.10 held to the tick last Thursday and then rallied on Friday. As a result, the RSI and stochastics have turned higher suggesting a potential to reach the 95.60/80 range in the near-term.

Since the EUR/USD makes up close to 58% of the USD Index weighting, the technicals suggest the single currency should trade lower. Fundamentally, there’s quite a bit of market moving data from the Eurozone this week including the second quarter GDP revision on Wednesday and the German IFO report on Thursday. In addition, considering the UK PMIs all printed lower recently, FX investors will be watching Tuesday’s Eurozone  PMIs for Brexit related weakness.

On balance, the EUR/USD picture is turning negative.

It hasn’t been an easy week for USD Bulls. Based on the close of NY Trade, the USD Index has fallen five consecutive days testing the 94.05 level last seen on June 24th……the day of the UK referendum.

Even though the US data flow has been on the firm side, the somewhat dovish comments out of the FOMC minutes has kept the downside pressure on the Greenback. Yesterday’s lower jobless claims, the uptick in the Philadelphia FED index and increase in the leading economic indicators were just not enough to convince FX investors that the US FED is serious about further normalization of interest rates this year.

With no first-tier data on the US schedule today, the best USD Bulls can look for will be a consolidation session which will allow investors with a longer-term time horizon to look for levels to establish better positions for the Central Bank divergence trade to re-gain market momentum. Besides, the FOMC holding on  rates is much different than the other G-7 Central banks which are still lowering rates.

Over the last three trading sessions, the best performing currency pair has been the GBP/USD. Since posting its lowest close in almost to 15 years near 1.2880 on Monday, the pair has rallied 300 points to its highest level in two weeks near 1.3175. Yesterday’s leg higher was triggered by a much stronger than expected retail sales report which posted a 1.4% gain versus a median forecast of around .1%. Clearly, the weaker Sterling has attracted tourists and boosted demand across the UK. In addition, the historically large short position in the pair reflects and unbalanced market due for a short-covering correction higher.

Looking ahead to next week, we expect the broader-based UK GDP data will reflect more negative aspects of the Brexit result and print lower than the .6% pace from two months ago.

In the lead up to the UK Referendum on June 23rd, many market commentators warned that a “Brexit” vote would have an acute and immediate impact on domestic UK assets in general, and on the price of the GBP/USD , specifically.   

After posting an intraday low of 1.2800 on July 6th, the Sterling recovered over 5% to reach an intraday high of 1.3481 on July 15th, but only managed to hold on to the 1.3340 level on a closing basis; over 120 points below the high and the highest NY close since.

From a technical perspective, this week’s price action suggests the GBP/USD has completed a bearish pennant formation based on the break of the 1.3220 trend line last week and the failure of the pair to post a NY close above last week’s low close of 1.3020 on August 5th. Following this pattern, the next key support is found at 1.2820 followed by the 1985 low at 1.2750.

An interesting aspect of this this technical pattern is the correlation break and divergence between the Sterling and the FTSE 100 Index. The UK Equities markets rallied alongside the GBP from early July on a combination of “time-lagged” UK economic data and expectations of further stimulus from the Bank of England (BoE).

However, since mid-July, several key UK growth aggregates have softened or offered little in terms of positive forward guidance. As a result, the GBP/USD and the FTSE 100 have diverged with the index posting its highest close of 2016 at 6902.00 today, and the GBP/USD picking up momentum to the downside. It’s reasonable to expect that if this recent trend continues, investors hedging out currency exposure on rising UK equity prices could add to the downside pressure on the Sterling.

Yesterday’s UK Housing Survey illustrates how the Brexit impact may be finally working its way into the overall UK economy. The GBP/USD was triggered lower as the RICS house pricing index slumped to 5% from 15% in June. This was the lowest reading in three years and underscores concerns about how heavily leveraged UK consumers are to housing, and the potential impact on retail spending if the property market continues to adjust lower.

Leading up to last Friday’s July Non-Farm Payroll (NFP) report, the USD was being offered against all the other major G-7 currencies. After the June Headline NFP number beat expectations by over 150,000 last month, many forecasters were expecting a large correction in the number of new jobs created this month. Most FX traders understood that the risk to the USD was asymmetrical and that an “as expected” reading would be USD negative.  

Instead, the robust NFP report allowed the Greenback to recoup the losses it experienced earlier in the week, the SP 500 reached an all-time new high close at 2176.00, US 10-yr bond yields hit a 3-week high of 1.60% and Fed Funds futures went from pricing a 57% chance of a 2016 rate hike to a 71% chance by the NY close.  

With the US economy posting an additional 255,000 jobs and average hourly earning increasing by 0.3%, it’s reasonable to expect that US interest rate policy will continue to move toward normalization while its peers continue to add to direct stimulus and unconventional easing measures. In addition, the forward outlook to the US labor market is improving with a jump in the participation rate, as well as, the total weekly hours worked.  

In short, by almost every metric, the US employment climate stands in sharp contrast to the dismal outlooks for the UK, Japan, most of Europe and Canada. That said, it’s our base case that seasonal factors effecting daily trade flows and a lack of any first-tier data this week could temper advances in the USD in the near-term. 

The impact of lower trading volume is best illustrated in the SP 500. Despite never trading lower than 1% below all-time high levels last week, the daily trading volume was consistently close to 25% below the 50-day moving average. With this in mind, we expect the USD, US Stocks and US Treasury rates to trade with an upward bias but with less momentum.