Payrolls posturing in fog of war
original post on Saxo Bank’s Trading Floor
The US dollar has retreated from recent highs against the majors and counter-intuitively, in the face of what is shaping up to be another US incursion into the Middle East. The move has resulted from a series of unrelated economic fundamental events occurring in various G-7 countries (plus China). Many are wondering what happened to the US dollar rally which was supposed to be starting when summer ended.
AUDUSD ended an August long free fall on better than expected Chinese August Manufacturing PMI and the currency pair has bounced, approaching key resistance in the 0.9220 area. A break above could see further AUDUSD gains to 0.9450.
GBPUSD also snapped its August decline at the beginning of the week with move above 1.5510 which suggests further gains to 1.5750, initially. Stronger than expected data including 2Q GDP and Retail Sales plus demand for GBPJPY are all contributing to this week’s GBPUSD strength. Even tomorrow’s Bank of England meeting should GBP USD neutral unless Governor Carney says something inflammatory.
USDCAD has not only lost its upside momentum, it is now flirting with support in the 1.0480 area, which if broken could lead to a retracement of the entire August selloff.
Is the price action in these three currencies real evidence of a turn in the US dollar fortunes? The EURUSD activity would suggest not. EURUSD gains are a lot less pronounced and are barely registering a recovery from the August. This could be in part to EURGBP selling but that is probably just a small factor.
BoJ, BoE, ECB and G-20 meetings
Much has been written about tomorrow’s Bank of Japan, Bank of England and European Central Bank meetings. The consensus appears to be that the FX impact from the three events will be minimal.
The G-20 meeting in St. Petersburg, Russia begins tomorrow. The esteemed leaders are there to discuss creating stronger financial regulations, reducing red tape and job creation. The US plan for "punitive" military strikes in Syria will likely derail the main agenda and keep markets unsettled due to headline risk.
"Fog of War"
It’s not called the "Fog of War" for nothing. The rapid rise and current elevated levels of oil prices is a constant reminder that a mass exodus into risk aversion could just be a few errant cruise missiles away. The US says that it is only planning "surgical" strikes on military targets, but a Bhopal style miscue is only a strong gust of wind away.
In my opinion, the FX markets, for the past two weeks, have traded off a series of country specific domestic data releases that created demand for the local currency. This happened following a period of US dollar strength, with Syrian tensions in part to blame, which may have seen the local currency oversold in a period of light liquidity. The subsequent moves triggered stops which exaggerated the recovery.
Friday’s non-farm data to confirm Fed tapering
However, all the trading is occurring prior to the release of US non-farm payrolls, a data release which is crucial to providing additional clarity on the tapering of the Federal Reserve’s asset purchase programme. If September will truly be the start of tapering, then Friday’s data will confirm it. In fact, I believe that the importance of the recent economic releases was merely to provide some justification for US dollar selling when the real reason is much simpler.
FX traders are actively adjusting or trimming their positions ahead of the Friday payrolls report in order to be better prepared to react to the information that is received. In fact, this is a usual trading pattern around payrolls but the activity is a tad obscured due to the number of central bank meetings, the G-20 and Syria.
The proof is the lack of meaningful follow-through trading outside the broad ranges. Since mid-July, the ranges for the majors are: EURUSD (1.3140-1.3440) GBPUSD (1.5110-1.571), USDJPY (95.50-99.90) AUDUSD (.8890-.9175) and USDCAD 1.0440-1.0570).
When the above ranges are broken in a decisive manner, FX traders will have some clarity on future US dollar direction and that won’t likely occur before Friday and perhaps not until the tapering announcement.