We have the usual problem with payrolls this morning, not only likely spikes as the actual diverges from the forecast but also the unhealthy tendency to draw wildly inappropriate conclusions from a single small set of data that everyone knows is bunk in the first place. Apart from the usual complaints about the participation rate, we are getting no discussion of the gray economy, mostly in services. Everyone from barbers to lawn care providers are out in force, working for cash. We don’t know the size of the gray economy in the US, probably less than Italy or Greece but not negligible. It will be discouraging to see politicians try to make hay out of it, too.
We are intrigued by the idea that the euro is decoupling somehow from risk sentiment in general, as Market News suggests. We would consider the top indicator of risk sentiment to reside in changes to the US and German 10-year yield, and those are suggesting today that risk aversion is higher. Therefore, we can postulate decoupling only if yields continue south and the euro reverses to the upside. Unfortunately, that is exactly the response we could get after today’s payrolls. We say it sends the wrong message and will make for very messy exchange rates for weeks to come.
What is most shocking about the euro’s big drop yesterday is that it’s the “right” one, given the economic fundamentals and institutional factors. But the market hardly ever does what is sane and reasonable, least of all when it comes to its darling, the euro. If it were behaving like any other currency in history, the euro should have devalued and devalued further from the fiscal and economic crises. Instead it has kept popping up on the most slender and fragile of evidence that somehow the eurozone will escape the consequences of bad design and bad management. We still worry that it can pop up again, too. Tricked twice, shame on us. One quite good reason to imagine we won’t get tricked again is that we have tremendous respect for the Finns. In a previous lifetime, we met people from the Finnish central bank. They were smart, careful, nuanced, and very, very deep (on the issue of allowing a change in FX regulations). We recall being terrified and impressed even though the meetings took place over two decades ago. We would never bet against the Finnish financial establishment. Ever.
This is not to suggest we would bet against the Germans, either. We may get EMU-funded bank supervision and recapitalization, but not in the next ten minutes, which is when the banks and the bonds need it. Talk of progress next week or October or year-end is still too rapid a pace of change, if we take past as prologue. It can easily become a race between fast-moving bond markets and famously foot-dragging eurozone officials, not neglecting to count political leaders who do not have the blessing of their taxpayers. Chancellor Merkel, for one, is a spectacularly competent politician. When she says “over my dead body,” we believe her.
All of this is to find justification for the new sell signals. The system calls for the reversal but we hate to obey on a Friday in summer when something new and wonderful can so easily come along and ruin it. The problem with technical systems is that you can always find a rationale for either story. History tells us to watch out for dollar buy signals and euro sell signals. As always on payrolls day, you should be on the sidelines watching instead of participating, since the probability of a good trade is very, very low.
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