There is life after the Fed – The dollar has staged a comeback after the blow from the central bank's dovish shift. What is behind the move? Valeria Bednarik, Joseph Trevisani, and Yohay Elam analyze positioning, responses from other central banks, politics, and encouraging US data leading toward the Non-Farm Payrolls.
Yohay Elam: The US dollar has been staging a comeback after falling sharply in the wake of the Federal Reserve's decision. Is it due to profit-taking? Positioning ahead of Friday's jobs report?
Joseph Trevisani: Partially but also the realization that the new Fed policy is fur the far future, at least in currency market terms. The projection materials already had fed funds at 0.1% until the end of 2022. US statistics are improving, manufacturing ISM and claims were good, the first absolutely and the second relatively
Valeria Bednarik: I was thinking that, given the Fed's shift in its monetary policy, giving more relevance to employment, somehow lifts the chances of having a bit more action with the NFP. At this point, I doubt it's just profit-taking
Joseph Trevisani: ADP seems to have gotten lost, the correlation to NFP has broken down
Valeria Bednarik: Well, it showed double the jobs it added in the previous month, maybe forecasts were too optimistic
Joseph Trevisani: The Fed has been talking up employment for all of Trump's presidency, this change makes it official
Yohay Elam: The US ISM Manufacturing PMI was strong, but the employment component contracted again
Joseph Trevisani: True, but employment indicators are laggards. I look more at the new orders indexes and they are very strong.
Yohay Elam: I think the ECB is fighting back. Philip Lance's comment was one of the triggers of the reversal
Joseph Trevisani: On inflation, the fed has not paid inflation any policy attention since the financial crash. Rate policy has been dictated by employment and recovery, not inflation
Valeria Bednarik: I do agree with that Yohay, but we know that, after the first impact, policymaker's like or dislike of a certain pair level is hardly a market mover.
Yohay Elam: Powell seemed to give up on inflation last year
Valeria Bednarik: The ECB somehow draw a line in the sand at 1.20, but if somehow the dollar resumes its decline, the central bank won't be enough to cap bulls' determination
Joseph Trevisani: If the US recovery goes into reverse, the euro goes higher, the ECB won't be able to stop it with comments. Their concern is, as always, exports and a higher euro. This is normal for them and has happened many times
Yohay Elam: I agree that the ECB cannot stop the euro from rising. I cannot see the Germans agreeing to what Powell announced, not in this lifetime. So Lane's comment was the spark needed to trigger some profit-taking, but I don't see a follow-through from Lagarde next week
Joseph Trevisani: There has not been as much focus on the EU recovery as the US. I agree I dont see any follow from the ECB.
Yohay Elam: August's Non-Farm Payrolls is the first hard-data report for the time after some of the government stimulus lapsed, and according to the economic calendar, it looks like another month of significant job restoration, 1.4 million
Valeria Bednarik: Good point there. Still, over 27 million American continue to receive some sort of insurance, according to official data
Yohay Elam: Yeah, some 13 million have yet to return to work. The stock market is rising like there's no tomorrow
Joseph Trevisani: True, but the markets are trading on the improvement or lack thereof...
Yohay Elam: As we speak, US indexes are down, but it's probably one of those buy-the-dip opportunities like in most of the past 11 years or so. Is there a Non-Farm Payrolls number that would cause stocks to fall?
Joseph Trevisani: Good question, a negative number would shake the markets.
Valeria Bednarik: Well, if the US adds 1.4 million jobs as expected, for sure the rally will continue. I would say that below 1 million, it could trigger some profit-taking ahead of the weekend. However, not expecting a significant sell-off in equities
Yohay Elam: How would the dollar react? Currencies have been shrugging off NFP figures for many months. Reactions have been mild
Joseph Trevisani: I think the dollar would fall if we get a negative number
Valeria Bednarik: As I said, I hope for a bit more action, just a bit, after the Fed´s shift in monetary policy
Yohay Elam: The Fed's reaction to the figures is more important than the figures...
Valeria Bednarik: Yups
Yohay Elam: I foresee a scenario – probably not this time – in which weak US figures trigger a sell-off in stocks. In turn, that pushes politicians to strike a deal, and that means less Fed action and therefore a stronger dollar. But this "bad news is good news" scenario will likely wait for another event...
Valeria Bednarik: Yeah, seems too early for that "normal" scenario.
Yohay Elam: What happens if NFP beats again, let's say around 2 million. More dollar strength, a breath of fresh air for the ECB?
Joseph Trevisani: In normal times, the US grows faster than Europe, I think the market is looking for that to happen again. Germany is the export titan in Europe and the euro has been a huge benefit for her economy. The German Mark would be far higher than the euro against the dollar.
Yohay Elam: Cannot agree more. The trade balance surplus dipped for a while, but now it's back to normal for Germany and the eurozone as a whole
Valeria Bednarik: But we are not in normal times. EUR/USD run to 1.20 had not much of a reason behind it. It could happen the opposite now, moreover if US data provides support to the greenback
Joseph Trevisani: Yes I agree, there was little economic logic to the run to 1.2000, it got started when the US jobless claims numbers reversed in mid-July..the trigger was economic but the follow was simply momentum
Yohay Elam: Not everything in markets is rational... 2020 has seen strong moves in markets, often exaggerated, and the year is far from over
Valeria Bednarik: And so the irrational behavior
Joseph Trevisani: The UAE/Israel deal may have helped cap oil. It popped over 43 briefly but is now back to 41
Yohay Elam: And the waning of hurricanes in the Gulf of Mexico
Joseph Trevisani: I certainly see the impact on gasoline prices around New York. Some are below $2 per gallon. ISM services August employment 47.9, still in contraction but ahead of July's 42.1. I wonder about the forecast of 31.9, not at all realistic. Overall 56.9 from 58.1. So a good but not great number
Valeria Bednarik: Indeed. Improving, but still far from optimal. Anyway, a positive sign for the USD
Joseph Trevisani: Yes, no damage to the refinery industry. Hurricane season has two months to run yet
Yohay Elam: That employment component expectation seemed wildly pessimistic, I focused on that in my preview. All in all, the leading indicators toward the NFP seem to confirm another month of robust job restoration. I would say that 1.4 million makes sense, maybe 1.5 million
Joseph Trevisani: Yes, it has been interesting for the past six months. Economists have had difficulty getting a handle on the swings of the economy. Understandable I think
Yohay Elam: The last pandemic was around a century ago. Some things have changed since then
Joseph Trevisani: A century ago econometrics was an undiscovered country
Yohay Elam: The economists in 2120 will have more information to rely on...
Joseph Trevisani: Analysis paralysis... old trading term. By the time you find the analytical evidence for trade the moment has passed. The signs are clear that the markets are returning to traditional comparisons. The dollars' recent fall was, you might say, reality-based, initial claims did jump, though, in the longer run, it did not signal a retreat in the recovery, just a blip. So far the markets have been agnostic to the election. Polls have tightened but to some degree that was inevitable. The first debate is about a month away, that could have an impact depending on how it goes
Yohay Elam: The polls hardly moved in the past month, a bit of convention bounces for both parties, quite muted. Polarization depresses volatility in polls, which is sad for politics junkies like myself, less excitement...
Joseph Trevisani: Full swing in the campaign is next week. The ads are already warming up the electorate. It's going to be a brutal run to the first debate.
Yohay Elam: I hope, so far FiveThirtyEight is super stable at around 70% Biden. Real ClearPolitics is showing around 7% for Biden, just like before the conventions. I want to see swings of more than 1.5%... So, NFP guesses? I'll go for 1.5 million
Valeria Bednarik: I feel optimistic today, will go for an upbeat reading, closer to 2 million
Joseph Trevisani: I'm looking for a win this time...1.75 million
Yohay Elam: I went for above expectations and I'm still the pessimist... Val won last time
Valeria Bednarik: So, we are all optimistic. A reading below 1.4 then, could be the market mover we long for
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