DailyFX.com - Dollar Traders Look Ahead to a Return of Liquidity and NFPs

Fundamental Forecast for Dollar:Neutral

  • The season is changing from the ‘summer doldrums’ and the Dollar is well positions for the market’s return
  • Top event risk this week is August NFPs which can trigger a rebalance between currency and rate speculation
  • Watch the volume on dollar-based majors with the release of NFPS using the FXCM Real Volume indicator

The Dollar closed out a strong August. Over the past two months, the Dow Jones FXCM Dollar Index (ticker = USDollar) has climbed 2.5 percent. Amongst the majors, the greenback has advanced versus all of its peers and gained an impressive 4.1 percent against its most liquid counterpart - the Euro. The ‘bullish’ label is a deserved one. However, further progress requires more substantive fundamental support. Relative performance versus weakened cross currencies and a stable economic footing are unlikely to drive EURUSD below 1.3000 or GBPUSD through 1.6500. The next leg will be decided between Fed rate forecasts and the level of volatility in the markets. As it happens, we happen to have the ingredients to ignite speculation on both fronts.

In assessing the motivation for capital to flow into and out of the US, a market-wide gauge of risk appetite measures the appeal of the currency’s ample liquidity (safe haven attribute) while local interest rate expectations gauge its future return (what I like to consider the dollar’s dividend). While the S&P 500’s charge bullish charge may be a skewed measure of speculative appetite, sentiment was certainly not suffering this past week the kind of crisis-of-confidence that would funnel capital into the greenback and Treasuries. That suggests that rate forecasts likely played a bigger hand in motivating the dollar last week.

Therein lies a problem. Treasury yields, market rates and Fed Funds futures have fallen well behind the pace of the currency. More than just a curb on further gains, this disparity could turn into motivation for a dollar reversal if fundamentals do not reassure the bulls. There is plenty of scheduled event risk to help feed rate forecasts. On the FOMC’s docket, we have the Beige Book due Wednesday and a range of speeches from the Fed’s Mester, Powell, Fisher, Kocherlakota, Rosengren and Plosser. Of those six, only Jerome Powell is a voter in 2015 when the central bank is expected to realize its first hike.

On the data front, there is a plenty to shape growth forecasts. The ISM manufacturing and service sector surveys, July trade balance, IBD economic sentiment survey, and Markit composite PMI is a comprehensive and timely read on economic health. However, its Friday’s labor data that will slice through the ambiguity and directly influence rate speculation. While the flash of the NFPs will elicit headlines; its the jobless rate, participation level and earnings growth that will influence the central bank’s timing. Therefore, that is where we should look. In the Fed minutes released a week ago, the group relayed that “many” officials believed that a strong growth for the labor markets may lead to an earlier rate hike.

While the potential impact from the jobs data is high, we should remember that it falls on Friday. That means there can be an uneasy quiet in the lead up to the release if there isn’t something else to motivate the dollar. Volatility and volume may finally prove a more meaningful counterweight to price action. While it is still early to expect a definitive rise in system-wide trading volume and activity, we are coming to a seasonal turning point which may help spur a fundamental shift in market conditions. The Labor Day holiday – which we are currently passing through – traditionally marks the end of the ‘Summer Doldrums’. With a strong correlation between volume and volatility, this natural return of liquidity can tip a the scales on a precariously balanced complacency. While such a sweeping change is difficult to expect, we should be prepared.

Related Articles
  1. Professionals

    5 Top-Rated Funds for Your Retirement Portfolio

    Mutual funds are a good choice for emotional investors. Here are five popular funds to consider.
  2. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  3. Chart Advisor

    Bumpy Roads Ahead In Transportation

    Investors are keeping an eye on the transportation industry. We'll take a look at the trend direction and how to trade it.
  4. Investing

    How ETFs May Save You Thousands

    Being vigilant about the amount you pay and what you get for is important, but adding ETFs into the investment mix fits well with a value-seeking nature.
  5. Mutual Funds & ETFs

    3 Fixed Income ETFs in the Mining Sector

    Learn about the top three metals and mining exchange-traded funds (ETFs), and explore analyses of their characteristics and how investors can benefit from these ETFs.
  6. Chart Advisor

    Agriculture Commodities Are In The Bear's Sights

    Agriculture stocks have experienced strong moves higher over recent weeks, but chart patterns on sugar, corn and wheat are suggesting the moves could be short lived.
  7. Investing News

    Top Tips for Diversifying with Mutual Funds

    Are mutual funds becoming obsolete? If they have something to offer, which funds should you consider for diversification?
  8. Professionals

    Top Stocks to Short, Go Long On to Beat the Market

    A long/short portfolio can help weather a variety of market scenarios. Here's how to put one together.
  9. Mutual Funds & ETFs

    Top 4 Asia-Pacific ETFs

    Learn about four of the best-performing exchange-traded funds, or ETFs, that offer investors exposure to the Asia-Pacific region.
  10. Mutual Funds & ETFs

    Top 3 Japanese Bond ETFs

    Learn about the top three exchange-traded funds (ETFs) that invest in sovereign and corporate bonds issued by developed countries, including Japan.
  1. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  2. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. What is the difference between passive and active asset management?

    Asset management utilizes two main investment strategies that can be used to generate returns: active asset management and ... Read Full Answer >>
  5. Is there a situation in which wash trading is legal?

    Wash trading, the intentional practice of manipulating a stock's activity level to deceive other investors, is not a legal ... Read Full Answer >>
  6. Are there leveraged ETFs that follow the retail sector?

    There are many exchange-traded funds (ETFs) that track the retail sector or elements of the retail sector, and some of those ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!