The real driver is the US-China trade deal and there we have no fresh news
|Outlook:
German industrial production fell 5.3% for the worst showing since the financial crisis of 2009. Analysts say talk of bottoming out is wrong. And yet the euro fell very little on the news—from 1.1110 before the release to the low at 1.1089 a few hours later. As of 7:30 am ET, the euro is already getting over it. Euro resilience in the face of catastrophic data is not unheard of and always terribly confusing. Maybe it's the attitude toward the dollar that counts and not sentiment toward the euro, at all.
The US has delivered some weaker data lately but on the whole, not bad enough to push the Fed toward another rate cut any time soon, as we have been writing about all week. In fact, the outlook for growth is actually a little better. The Atlanta Fed now has Q4 at 1.5%, from 1.3% in the previous forecast. Here is the story: "... increases in the nowcasts of real personal consumption expenditures growth and real private fixed-investment growth were slightly offset by decreases in the nowcasts of real private inventory investment and real net exports."
In plain English, expected rises in consumer spending and capex more than offset declines in inventories and exports.
Notice that the Atlanta Fed, and indeed any economist worth his salt, doesn't name payrolls in this forecast. Those who imagine that a lousy payrolls number this morning will trash the dollar may well be right, for a short while, but a lousy payrolls number will hardly trash the GDP forecast. It's not exactly irrelevant, especially if you are a trader on a short holding period timeframe, but it's just not all that important for the Big Picture.
One reason is normal variability, and this time we have the GM strike ending plus the Census hiring, among other things. Then there's seasonality adjustments that have screwed up before. Then there's the idea, gaining adherents by the day, that payrolls is not a particularly good number in the first place, as the amount of activity off the books is high and rising. Nobody is willing to talk about the gray market but most estimate put it at 10%. We'd guess it's more like 20% or maybe more. The gray market is one of the factors behind robust consumption and robust consumption is the one key thing holding up the economy.
So, if payrolls disappoints and the dollar gets a downward spike on the news, it will be on "bad analysis." This is just one of the reasons we argue against "trading the news," recently touted by risk-embracing advisors as easy as pie and highly profitable. Well, no. On any one occasion, a trader might get lucky. We know the dollar spikes, usually both ways, on payrolls. Predictability is nice, and trading on imagined responses to bad data that you know is going to reverse might be an interesting game, but it's hardly a coherent trading philosophy that warrants risking real money. In fact, it's a gambling game where you think you know how the dice is loaded or the deck is stacked. We take FX analysis (and our money) more seriously.
Then there is the so-called technical observation, this time in the FT, that shows the dollar index about to test support at the 200-day moving average. Go back and check—how reliable is the 200-day as an indicator? In other words, how many times did the dollar index break it to the downside and keep going? The answer is twice over 35 years. Only a chump would trade on that "evidence."
So, back to the numbers. Bloomberg is sticking to the forecast of 183,000 new jobs in November, with the unemployment rate at 3.6% and annual wage growth at the same 3.0%. There is absolutely nothing here for the Fed to think about. We tend to exaggerate the effect of payrolls on the Fed, anyway. The Fed often cites low unemployment as a policy victory but we don't recall the Fed even commenting on an aberrant bad number.
Finally, the real driver is the US-China trade deal and there we have no fresh news. This alone may account for wobbly FX moves. We do expect the euro to rise and the dollar to fall if we get a Phase One deal and the deadline of Dec 15 is only a little more than a week away, with the UK election just ahead of that. Next week is going to be awful. So far it looks like positioning favors a trade deal getting done and the Tories winning, ending the prospect of a hard Brexit. On these grounds, we can see why shorting the dollar is appealing. But admit it—it's guessing.
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