Strong NFPs Fails to Lift Dollar
Forex markets posted some erratic behavior into the close of last week, as surprising economic data jolted markets before stabilizing and returning back to opening levels. Without question, the main event of the week was the US Non Farm Payrolls report, which came in much better than expected and immediately benefited the US Dollar. In addition to this, the national unemployment rate fell more than expected (another economic positive).
So, the next question is this: How were markets impacted? The answer is somewhat confusing. Since the data was Dollar positive, Dollar gains were seen immediately. Positive data supports Fed tapering arguments, and all of this taken in combination is supportive for the greenback. But what must be noted here is that profit-taking quickly set in and markets soon reversed. Versus the GBP, the Dollar actually closed unchanged. Those of us that actually watch the fundamental data and trade based on these results were perplexed by this (and likely stopped out at a disappointing break-even).
Unfortunately, this is the reality of the forex markets. We will always see instances where market data works in our favor but market prices do not (or vice versa). At this stage, the US Dollar is clearly undervalued, especially against the Euro and GBP. For those of us still short in currency pairs like the EUR/USD and GBP/USD, this is where the old market maxim comes in: Patience pays. We will see how this forecast unfolds in the next month.
Next Week’s Positioning for Currency Markets
In the week ahead in forex markets, traders in Asia will get the opportunity to react to the unfolding US results during the Monday session. There are very few scenarios under which investors could interpret last weeks economic data as a negative for the USD, so we should start to see more Dollar buying as market liquidity returns to full strength. Next week’s data calendar will be slower relative to what was seen last week, so traders will likely be working off of central bank commentaries now that voting members in those banks will have more economic information on which to base policy decisions.
It would not be surprising to see positive references made with respect to the improving unemployment rate, which now stands at 7.0%. The Fed said said in the past that stimulus programs will be needed until this rate drops to 6.5%, so the progress being made here is significant. If we do manage to see comments made in this direction, look for it to become a major catalyst for US Dollar strength, as investors will start hearing more discussion on the increased probabilities for stimulus tapering (which is a clear bullish signal for the greenback). In any case, we are unlikely to see the same level of volatility in the forex markets next week as there is less data to work off. This favors range trading strategies, as breakouts are much less likely.