And it’s Gone: NFP-Bump Erased from the US Dollar

2016-08-10 13:31:00

Talking Points:

- Many global markets continue to exhibit subdued price action, and this could remain a encumbrance to momentum leading into the Jackson Hole Summit at the end of this month (August 25-27).

- Despite this lessened activity, the US Dollar continues to sell-out of gains from last Friday’s NFP-pop. At this point, we’ve erased all of the NFP-gain, and this USD-weakness presents some interesting themes for traders to work with despite the apparent dearth of volatility.

- If you’re looking for trading ideas, check out our Trading Guides. And if you want something more short-term in nature, check out our SSI indicator. If you’re looking for an even shorter-term indicator, check out our recently-unveiled GSI indicator.

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Many global markets are continuing to exhibit some element of the ‘summer trading’ lulls, with depressed volatility and tighter price movements. And with a light week of data, the start of the Summer Olympics while also being at the latter-portion of a summer that’s been abnormally action-packed with the Brexit referendum in June; we have a perfect recipe for continuation of ‘quiet’ markets. But as we wrote yesterday – traders would still want to remain cautious despite this apparent lack of activity as there are still risk factors out there that could flare-up at a moment’s notice.

One market that has not been quiet on the day is the US Dollar. After last week’s NFP report blew beyond expectations, the US Dollar saw a quick rush of strength; and this was fresh on the heels of a big move lower after the abysmal GDP report of the week prior. To be sure, there probably aren’t many that are expecting any actual rate hikes out of the Fed anytime soon; but as we see data come-in above expectations out of the U.S., we’ll see the simple factoring-in of a slightly-higher probability of a rate hike out of the Fed without any actual expectation for the delivery of said rate hike at any point in the near future (odds of a hike out of FOMC before the end of the year remain below 50%) – and this can equate to near-term USD strength. This is what explains the USD-move post-NFP.

But after NFP, traders have come-in to sell USD from a higher level, driving price action right back down to the support zone seen last week.

Created with Marketscope/Trading Station II; prepared by James Stanley

With conditions such as we have now, traders would still want to utilize a fair amount of caution, particularly if looking to chase any near-term trends in what could continue to show as somewhat of a ‘quiet’ trading environment. In such environments, markets may exhibit a higher tendency to display ‘mean reversion’ like tendencies, as breaks of support or resistance may lack the volume to follow-thru in a continuation-like breakout.

So this brings up a couple of interesting prospects for the trader in such environments. Traders can either a) look to trade consolidation of trends, i.e., mean reversion or b) traders can line up ‘bigger picture’ ideas to be executed when volatility returns, or as price action meets the setup’s parameters. This is similar to what we had done on Monday of this week when looking at USD in relation to the Japanese Yen and Gold prices. But now that the US Dollar has slammed lower into support, the price action setup in each of those markets has changed. Below, we take an updated look at both.

USD/JPY

For longer-term USD-bull thesis, this may become one of the more attractive options in the coming weeks/months, and this is largely centered on the expectation that Central Banks will continue to do what they’ve been doing. While the Fed may not be near a rate hike anytime soon, the Bank of Japan is probably quite a bit further away from any element of policy tightening. As a matter of fact, just last month expectations were running high for another extension of Japanese monetary policy in the effort of fighting deflation. But after the BoJ underwhelmed and then after the Japanese Government Budget indicated far less fiscal stimulus than originally hoped, the Yen reversed as traders sold out of ‘stimulus bets’ in Japanese markets. But is the Bank of Japan done with QE and stimulus? Probably not: In previous comments, Prime Minister Shinzo Abe said that a ‘comprehensive, bold economic stimulus package’ was coming this fall. And it’s still summer. And Japan is still deflating. So we probably haven’t heard the end of Japanese QE efforts, and the big question is when Japanese Central Bankers or politicians might begin talking up this prospect. This can be an incredibly difficult type of thing to time, so price action can be hugely helpful here.

On the chart below, we look at USD/JPY approaching prior support levels around a confluent zone of interest. Should support show on the daily chart, this could present an interesting reversal setup in the effort of trading long-USD, i.e., consolidation or ‘mean reversion’ of near-term weakness currently being seen in the Greenback.

Created with Marketscope/Trading Station II; prepared by James Stanley

Gold

Another market that’s seen a strong move on the back of the dose of USD weakness has been Gold. Gold prices opened the week at support after getting hit lower on the back of NFP. But that support didn’t last for long as prices have been ripping higher over the past two days.

As we mentioned above, traders would probably want to be careful of chasing these short-term trends, especially when so far away from near-term support. But this could be a setup that traders could attempt to plan around should USD-strength begin to show in the effort of buying at or around support in Gold prices.

On the chart below, we’re looking at the same support structure that we had discussed on Monday, but with the addition of a new level a bit higher on the chart given this recent bump in prices. I’m calling this ‘S1 Minor’ to denote its more aggressive stance relative to prior support structure. This would simply denote that this is a less-tested level with fewer indications of support potential at this point, but, nonetheless, could be used as an aggressive price level to plot bullish Gold stances.