For the First Week of 2017, A Return of Liquidity and NFPs
• A fading liquidity was the most prominent feature of 2016's close, its return will be critical to trade in 2017's open
• We will start off the New Year with an extended Dollar and S&P 500 with a need to reestablish commitment
• Data will fill out quickly in the opening week of January, but NFP's is the most distinguished listing
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Liquidity was the name of the game to close out 2016 and it will be the prime mover to open 2017. Thin trading conditions lead to a very erratic backdrop and require traders to adapt. That was apparently through the past week with a moderation of prevailings moves like risk appetite (manifest in a S&P 500 pullback) and Fed rate forecasts (with the Dollar easing from 14 year highs). It can also lead to more dramatic moves like the surge in EUR/USD which found a sizable order in an otherwise ill-equiped market to absorb the demand. How long the shallow market conditions persist into the New Year will be important to assess as trading approach should be tailored to what we are dealing with. For certain, Monday will carry forward the quiet as an official market holiday for the majority of the financial system. But after that, it's off to the races.
When participation is topped off, we want to see where this fuel for conviction aligns. Are we going to pick up on the mature moves behind speculative positioning and Fed forecasting, or will skepticism and opportunism cut these complacent moves down? There is certainly a skew in terms of how much fast progress can be made with versus against the prevailing trends, and it will be important to incorporate that factor in with the general 'probabilities' of direction. Heading into the New Year, I believe that it is very unlikely that we make it another 12 months of complacency and a reach for yield amid growing threats and tepid growth. Logically, it is unlikely that we will even make it to mid-year before some significant rebalancing is found. Yet, it is important to trade was is unfolding rather than what we want to happen.
For scheduled event risk through the opening week, the docket fills out rather quickly after the holiday lull. There are a range of PMIs (economic activity proxies) as well as sentiment indicators from China to Europe to the UK to the US. That is an important economic starting block, but history suggests the traders have been somewhat fundamental-blind to the influence of this data. Without doubt, the guest of honor for the opening week is the US labor data for December. The change in payrolls (NFPs) is a risk favorite and will play that role nicely. For the more systemic implications for rate expectations, the underlying average hourly earnings will gauge traction through inflation and true labor health. With pairs like EUR/USD and USD/JPY dancing around key levels and primed for technical breaks, this looks like an explosive mix for the start of the New Year. We look at the opening foray into 2017 in today's Trading Video.
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