Though the dollar was put through its paces today with a notable, bullish swing that began before the US session open; the currency remains just as directionless as it has been for the past few weeks. However, this may come to an abrupt and dramatic end relatively soon.
The world’s most liquid currency has drifted in a holding pattern against most of its most liquid counterparts for nearly three months; and the fundamental and technical pressure behind the inevitable breakout has only grown with time. Conditions are ripe for a meaningful drive to develop behind the dollar and investor sentiment in general. Chart patterns are signaling a break out is long overdue, liquidity has thinned out ahead of the long US holiday weekend and the FX world’s most market moving indicators is scheduled for release tomorrow. Yet, it is important to consider whether these are the ingredients for a short-lived breakout or the birth of a new trend – which is what market participants are really waiting for.
Everything that has happened with the dollar this week seems to be a build up to tomorrow’s August non-farm payrolls release. This indicator has a distinguished history for the trading community. Though there are fluctuations in general market activity and there may be instances where a report was overlooked, the labor data is consistently rated among the most market moving economic releases. In fact, after last month’s release, EURUSD dropped nearly 200 points in a matter of hours. Should we expect the same level of intensity from the August figures? There are a few factors working in favor of this being a volatile event: market depth is relatively shallow; the dollar has been restricted to an unnaturally tight range for the past two weeks; and there is a growing rivalry among the world’s largest economies to generate the fastest and most momentous recovery among their peers. On the other hand, low liquidity also means a lack of follow through on new trends. And, lest we forget, we still need a meaningful impression from the data itself. Fundamental traders are certainly conscious of the diminishing trend in net job losses; so the forecasted 230,000 contraction would not require speculators to do much in the way of repositioning. Looking at rally from the greenback after the July data crossed the wires on August 7th, it was clear that the catalyst was the unexpected downtick in the unemployment rate. The headline payroll count can vary considerably and still fit within the past six month’s trend; but further confirmation that the unemployment rate is leveling off would be a genuine surprise.
In mapping out the path to volatility, we shouldn’t disregard the other meaningful economic milestones that will help forge the larger trends. Aside from the unchanged level of initial jobless claims through August 29th, we received measures of both service sector activity and retail spending. The ISM non-manufacturing report claims less of an impact than its factory counterpart; but it nevertheless accounts for a greater segment of the economy. The service industry accounts for an estimated 90 percent of business in the US; and so the 11-month high 48.4 reading for August is meaningful. Notable details from this report include the highest levels of employment and new orders since September. As for ICSC Chain Store Sales, consumer spending is seen clearly weighing on economic activity. The 2 percent contraction in the year through August was the smallest in 11 months; but this series has nonetheless held underwater since July of last year.