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Trading Dollar, S&P 500 Before and After Liquidity Slump

Trading Dollar, S&P 500 Before and After Liquidity Slump

John Kicklighter, Chief Strategist

Talking Points:

  • The Dollar's run cools again with pairs like USD/JPY and USD/CHF coming on meaningful resistance
  • S&P 500 as a proxy for risk trends has yet to budge, and liquidity would make for a tough environment to stoke trend
  • Top event risk ahead through the liquidity fog is Friday NFPs and the G-20 Summit

See how retail traders are positioning in the majors using the SSI readings on DailyFX's sentiment page.

Liquidity is not often an issue - but when it is, it represents the primary risk and complication that traders need to assess. Trading through the end of this week is an effort of managing and adapting to the clash of high-level event risk and the confluence of liquidity dampeners. Low volatility managed by an extreme collective monetary policy effort will be further intensified by the seasonal drain associated with the Labor Day holiday weekend. That structural drain had already manifest itself in markets that have shunned trends and carved out ever-tighter ranges. However, the anxiety that has smoldered behind the restraint will likely also intensify.

Thin markets typically result in non-movement when there is nothing to stoke volatility. However, there is a list of high-level event risk to close out the period punctuated by the Friday US NFPs and the four-day G-20 Summit in China. The former is certainly a lever for the Dollar, but it can readily jump into a catalyst for global speculative position. Given the increased focus on monetary policy's faltering influence over economic and financial bearings, the most divergent and significant policy effort among the major central banks will surely draw attention. As for the G-20 meeting, ability to maintain growth and low volatility - much less establish capacity for fighting future recession or crisis - will face the growing skepticism now infamous in trading circles.

These conditions paint a picture of two trading approaches: before and after the seasonal liquidity drain. Before, in the final 48 hours of trading this week and into the quiet portion of the week ahead, favors a short-term and perhaps technically oriented approach. After, when markets fill out and there is capacity to build upon themes, there is opportunity for trends. We look at conditions and opportunities on both sides of this mountain in today's Trading Video.

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