US Dollar: Why Wasn't There a Reaction to Non-Farm Payrolls?
Written by Kathy Lien, Chief Currency Strategist
• Australian and Canadian Dollars Climb to Fresh Multi Decade Highs
• Euro: Sharp Intraday Reversal Opens Door for Move Back to Record Highs
US Dollar: Why Wasn’t There a Reaction to Non-Farm Payrolls?
The non-farm payrolls report is generally the most market moving indicator for the US dollar. Yet despite sharp intraday volatility, the dollar ended the US trading session not far from where hovered prior to the payrolls release. Although some could argue that this may be due to the lack of a surprise in the headline number, this observation is incorrect because the revision to the August number was substantial. Having originally reported that the US economy gave back 4k jobs, we now learned that 89k jobs were actually created during the month of August. In September 110k jobs were added to corporate payrolls. This revision highlights the inaccuracy of the monthly payrolls report which was further confirmed by the fact that the Labor Market plans to revise down payrolls for the 12 months ended in March 2007 by 297k. With the validity of the report in question, the price action in the dollar suggests confusion amongst traders. With Monday being a holiday in Japan and a semi-holiday in the US (at least for the bond markets), position squaring seemed to be the market’s preferred action. For those looking for more clarity, take a look at the bond markets. Yields are up across the board indicating that the bond traders believe that the payrolls number significantly reduces the chance that the Federal Reserve will continue lowering interest rates. Fed fund futures have gone from pricing in the possibility of 2 rate cuts this year to only one by Christmas. The odds that the Fed will lower rates at the end of this month are now fifty-fifty. Usually the reaction in the bond markets is the most accurate, which is why the US dollar could bounce once traders return from their holidays. Equity traders are also happy that the US economy is not in as much as trouble as initially anticipated. Next week, we will get a better sense of whether the worst is really behind us with retail sales and producer prices due for release. The trade balance and business inventories are also expected; the weak dollar should help to narrow the trade deficit.
Australian and Canadian Dollars Climb to Fresh Multi Decade Highs
The return of risk appetite has driven the Australian and Canadian dollars to fresh multi-decade highs. For the past few weeks, the Australian dollar has been making new 18 year highs, but today, the currency took out its 23 year high. This one way trend has now lasted for almost two months and even though many traders may think it is premature, it could be time to start talking about whether the Australian dollar will hit parity with the US dollar. It is hard to believe that the Australian dollar is as far being even with the US dollar as the Canadian dollar was just six months ago. With the housing market in Australia still strong, the central bank could continue to raise interest rates. Next week’s Australian employment numbers will help to confirm or deny that. The Canadian economy is also performing very well. In September, employment jumped by 51k, which is the biggest rise in six months. This drove the unemployment rate down to 5.9 percent, a 33 year low. Given that the market was looking for only the jobless rate to rise and only 15k jobs to be added by Canadian firms, this number completely blew away expectations, causing the Canadian dollar to rise to a 31 year high. Like in Australia, another rate hike by the Bank of Canada is still on the table. The only meaningful economic data from Canada next week is the trade balance. Although there was no economic data from New Zealand overnight, the currency also rallied on general optimism towards high yielding currencies. New Zealand retail sales are the only piece of data due out next week.
Euro: Sharp Intraday Reversal Opens Door for Move Back to Record Highs
Having hit a low of 1.4033 intraday, the reversal in the EUR/USD was impressive. Although the price action may be largely due to the reasons listed in our USD Commentary, ECB President Trichet’s refusal to acknowledge the burden that a strong Euro is having on the region’s economy is still giving traders the green light to go long Euros. Exporters and politicians are already screaming and we believe that it is only a matter of time before the ECB buckles as well. What they need is more confirmation that the economy is weakening and we may get a bit of that in next week’s economic reports. Germany, France and Italy are all releasing industrial production numbers and we are expecting German factory orders. There are also no less than eight ECB officials scheduled to speak which could provide some interesting fodder for trading.
British Pound Extends Gains Ahead of Busy Data Week
Despite warnings from HSBC that “hot money” could be exiting the UK in the coming months as growth slows and funds lose confidence in the country’s economic management, the British pound continues to rise. There are a lot of UK economic data due out next week including producer prices, industrial production, retail sales and the trade balance. The market will be looking to these numbers for more clarity on whether the Bank of England will be lowering interest rates this year. Bank of England Governor King is also scheduled to speak on Monday. If he remains hawkish, the GBP/USD could take out 2.05.
Carry Trades Rally as Dow Hits New Record High Intraday
Japanese Yen crosses have performed extremely well with the Dow hitting a new record high on an intraday basis. The stronger US number has helped to alleviate some concerns that the US economy could fall into a recession and now that the risk is eradicated for the time being, traders are a bit more willing to take on risk. On Wednesday, the Bank of Japan begins their 2 day interest rate meeting. Rates are not expected to be changed, which should make the announcement a non-event. Japanese markets are closed Monday.
Written by Kathy Lien, Chief Currency Straetgist for DailyFX.com www.dailyfx.com
There was a time not too long ago when technical indicators worked just like they were supposed to. Momentum divergences foretold trend changes. Volume kept pace with rallies as they rumbled on. Breakouts from patterns either resulted in immediate rallies for us to buy or, in the worst-case scenario, they failed right away for a quick stop out and a small loss.
In January and early February of 2007, the stock market sported every divergence in the book but kept chugging higher. Pattern breakouts occasionally failed, shaking many traders out before the stock took off.
However, despite these conditions, following the charts of individual stocks, buying breakouts with no questions asked and honoring stops religiously produced impressive results. The icing on the cake was being in several stocks only days before takeover deals were announced and gains ran up to 40% for a few days of risk. Read on for a step-by-step overview of how these returns were achieved.
The Market
In late February 2007, when the global stock market took a temporary header following the Chinese stock market's impromptu 9% surprise, it seemed that all the frustration may finally be over. The rally had finally ended - or so it appeared.
With a nice 8% pullback in the books and a happy few weeks for the bears, even the die-hard grizzlies had to see the bullish candle formation that formed in mid-March. No problem. It seemed to be prime time for a bounce before the next leg down.
Figure 1
Source: eSignal
Volume Declines
The ensuing rally started uneventfully and, as the trend progressed, it was painfully obvious that volume was falling as prices were rising.
Why was that painful?
As many chart followers know, falling volume in a rally means that the move is unsustainable. A negative divergence was signaling caution and telling us to look for places to sell stocks, not buy them. And let's not forget that resistance levels on most major indexes loomed large. (To learn more, read Volume Rate of Change.)
Figure 2
Source: eSignal
Things Don't Go As Planned
Record highs fell like dominoes, even as gold and oil were rallying and interest rates were going up.
That's not the way it is supposed to work - but there it was.
At this point, it seemed too late to join. After all, the bull market was over four years old - a geriatric - and it was the second-longest rally on record not to see a cleansing 10% correction. The 8% dip was nice, but not enough! Surely, a real correction was long overdue.
Even worse, from a psychological standpoint, daily technical screens of stocks were turning up buy candidates all the time.
Where was that brutal "C–wave" prognosticated by the Elliotticians? What about the argument that a cyclical bear market was due to follow the cyclical bull market that had (supposedly) just ended? (For more on the Elliott's theory, read Elliott Wave Theory and Elliott Wave In The 21st Century.)
As March (2007) came to a close, the rally was still going strong. Volume continued to stay weak and even momentum indicators were soft. Sooner or later, the rally would have to roll over so that the next leg down could begin.
April came and went and the major stock indexes were still setting all-time highs almost daily. Stock screens continued to turn up more candidates to buy and cognitive dissonance (or the anxiety that results from simultaneously holding contradictory or otherwise incompatible attitudes or beliefs) set in for me and I had to go in with the buy signals. We were still bears, but our portfolio was getting heavy with longs!
Failing Indicators, Successful Returns
As May began, analysts were looking back into history for previous times when the Dow was rising for so many days in a row. At one point, it was 24 gains in 27 days, matching a record set 80 years earlier on its way to 30 wins in 36 days.
Charts showed a trend of gains at a steep rate of ascent. Momentum indicators were moving into overextended territories and volume was still not impressive. Everything was technically wrong again - yet up it went. (For related reading, see Introduction To Types Of Trading: Momentum Traders.)
Figure 3
Source: eSignal
Despite being dead wrong on the recovery rally - and even ignoring outside factors that were driving it because they were not on the charts, such as the glut of global liquidity - our portfolio of individual stocks was green. And not just a little green, but hugely green! Profits were everywhere, thanks in part to the rising market, but it took a certain discipline as an analyst and stock picker to even be in a position for the market to bestow its blessings.
This bear followed setups in individual stocks without regard to the overall market bias. Breakouts came and were taken. Stops were honored when hit, no questions asked. And very few positions were closed just because they seemed profitable enough. Many of those went on to even bigger gains. (For related reading, see Patience Is A Trader's Virtue.)
Keep Bears on a Short Leash
The only bearishness to come through the stock picking and portfolio management process was keeping tight stops and constantly trailing them higher. Only a few positions choked on these tight leashes. The strength of the bull market prevented many of these trading errors from happening, proving that in some cases, luck can work in a trader's favor. (To learn more, read Tales From The Trenches: Don't Count On Luck.)
Take Profits from Takeovers
One more factor making it hard to be a bear was the increasing number of takeovers and mergers. The term "private equity" was now on the nightly financial news and the amount of money seeking for something to buy surged.
What the poor bear, who was being transformed into a very reluctant bull, to do? Continue to buy technical breakouts and benefit when some of them turned into takeovers.
Again, there was no advanced knowledge or even an analysis that gauged the likelihood of these takeovers happening. It was simple chart reading and a classic example of the charts showing that somebody knows something before the event and leaves tracks as they buy. Some of these lucky pops were to the tune of 40% - not bad for being in a position for less than a week. (For further reading, see Trade Takeover Stocks With Merger Arbitrage.)
Making this whole yarn even better was that the short positions in the portfolio did not fare too poorly either. It's a testament to proper chart reading when short positions, as a group, still make money in a bull market that is breaking records.
What Did We Learn?
Money was made despite being dead wrong on the market. Money was made despite harboring a misguided opinion of what should and should not be happening.
Remember: There is nothing worse in the trading game than thinking that you know where the market is going and holding on to that opinion for too long. So, follow the market. Take its technical signals. Honor stops religiously. And, be sure to do it with enough different positions to benefit from the averages. (To learn more, read Ten Steps To Building A Winning Trading Plan.)
Not every stock is going to be a winner, but a portfolio of technically sound stocks is going to throw off a nice mix of winners and (limited) losers for a very healthy net profit at the end of the day.
Michael Kahn, writes the daily "Quick Takes Pro" newsletter (free trial at www.quicktakespro.com) and the twice weekly technical analysis "Getting Technical" column for Barron's Online. He is the author of two books on technical analysis, most recently Technical Analysis: Plain and Simple, and was Chief Technical Analyst for BridgeNews. He also is on the Board of Directors of the Market Technicians Association and writes frequently for several trade publications.
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