Will an Absence of Catalysts Turn AUD/USD, USD/JPY and NZD/USD?
- The presence of high profile event risk can often anchor markets from developing technical or thematic trends due to anticipation
- With the State of the Union and Fed decision passed while the risk trends as yet refuse collapse, Dollar is left adrift
- It is easier to promote a 'path of least resistance' move than it is to push major reversal or extend mature trends
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Anticipation Kills Motivation
When there is a high profile event scheduled just over the horizon, speculators are far more cautious about employing capital on a risky exposure for fear of being summarily caught on the wrong side of a fast moving market. High profile events that can tap deep influential fundamental themes can readily change the direction and pace on a market with the proper application of surprise. Ironically, the week each month that includes the first Friday is often a deadzone for the Dollar for exactly this reason. The change in US nonfarm payrolls (NFPs) and all the regular labor statistics is released during this period each month. The typical potential this round of statistics holds over risk trends and monetary policy has killed many tentative breakouts and distracted markets away from alternative fundamental themes.
NFPs Wasn't the Peak Influence this Week
Over the past months, we have seen the impact of the US jobs data significantly lose traction for moving the FX and capital markets. The risk implications are usually based on the degree of surprise the series generates. While there have been some significant deviations in a few 'actual' figures relative to their respective forecasts, the reaction from the zombie-like rise from benchmarks like the S&P 500 tempered the impact. For the Dollar, the ultimate importance of the data is through its influence on monetary policy expectations. However, that is a theme that has clearly lost pull over the past year. Despite a steady run of rate hikes and forecasts for three more in 2018, the Greenback has defied the bullish implications and persistently dropped.
State of the Union and Fed Decision Come and Gone
This week was not completely without fundamental tumult. A combination of influential themes threatened to coincide for the perfect storm of volatility between the resurgence of protectionism, monetary policy and a jolt of clear risk-derived repositioning. With all three already seeing some pressure heading into the week, the combination of the State of the Union and Fed rate decision were perfect venues to light the fuse on all of it. And yet, the event risk proved a dud with both the S&P 500 and Dollar left dangling after critical breaks with no motivation for recovery or extension. Now, we are left to drift. That said, in these less encumbered conditions, there are more rudimentary forces at work. Booking profit or generally moderating risk means there is a natural interest to ease back on extended trends. Technical boundaries are also more robust in these conditions. So, one-sided markets with high profile techicals present better probabilities.
Dollar Pairs that Need Conviction vs a Pendulum Swing
Looking to the Dollar itself against this backdrop, the trade-weighted DXY and an equally-weighted synthetic index show the currency at three-year lows after a 13-month tumble that has had little relief. Though we have cleared the key support level in the indices' case, follow through is still the more difficult campaign to mount given the dive has already run against the current of fundamentals. Therefore, the path-of-least-resistance is for correction. Yet, correction for EUR/USD is going to likely require a strong charge given the comfort in the past week's range and past five months general congestion. GBP/USD meanwhile is readily anchored by Brexit - whether bullish, bearish or neutral. In contrast, AUD/USD and NZD/USD have produced very clean technical drives that have also hit technical boundaries and will soon be forced to break out of sheer necessity (running out of room). USD/JPY's drive has been less persistent, but the congestion test and rejection is far more familiar. We discuss the appeal of AUD/USD, USD/JPY and NZD/JPY in current conditions in today's Quick Take Video.
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