Friday’s non-farm payrolls (NFP) report seemed to rekindle a forgone relationship between stocks and the US dollar, and two technical conditions in the US dollar index and S&P 500 would confirm this to be true.
Good morning, traders. Todd Gordon here from TradingAnalysis.com. You may have also seen me on CNBC’s Money in Motion or Fast Money, or elsewhere around the foreign exchange industry. This is my first article with Daily FX.com, and must say I’m very honored and excited to be contributing to such an accomplished organization. With so much going on in the markets, however, enough with the pleasantries and let’s dive right in to business!
The US Dollar and Non-Farm Payrolls
Friday’s non-farm payroll (NFP) figures gave the four major asset classes quite a shot of volatility. Equities, bonds, commodities, and currencies all moved sharply in reaction to not only the payrolls for April, but the 164,000 in positive revisions to the prior three months.
The initial reaction to positive US data was not unlike the trend we’ve seen since early February: a stronger US dollar (USD) as the expectations of sustained quantitative easing (money printing and bond buying) are reduced. Once the dust settled after the strong US payrolls, however, an interesting dynamic emerged after completing the first step of my three-step trading process, intermarket analysis.
The US Dollar Correlation Not Seen in Years
Pictured below is a 60-minute overlay of crude oil (blue), S&P e-mini futures (black), USDJPY (orange), US dollar index futures (pink), and ten-year US treasury notes (gray) for the month of May. The relationship leading up to Friday’s report was very much in line with the long-standing direct correlation of S&P futures and crude oil, which are both inversely correlated to bond prices. No problem there.
What’s interesting is that, since early February, the global macro flow is showing a new correlation. A risk-on market(higher stocks, commodities, and lower bonds like we saw last week) is now being accompanied by a higher US dollar, whereas over the past five years during the credit crisis, the US dollar traded inversely to the stock market.
Is this the start of a new, more direct stock/US dollar correlation that short-term traders can use to set up trades? If you look closely at price action following the NFP report, I think you’ll reach the same conclusion as I did: no.
Guest Commentary: Intermarket Relationships in Focus
Notice that with a strong US jobs report, the US dollar index did not close at the highs of the week, like crude oil and the S&P 500 did. Moreover, what makes this US dollar non-confirmation even more odd was that USDJPY did close at the highs of the week.
So, breaking that down further, the Japanese yen (JPY) is the second largest of six major currencies that comprise the US dollar index futures. That means that even with strong USD performance against JPY on Friday, the USD was so weak against the other components of the dollar index that it dragged the index lower at the close. Major pairs including EURUSD, GPBUSD, and AUDUSD all moved higher on the session, while USDCAD and USDCHF moved lower.
The takeaway here is that despite a very strong US jobs number, the USD could manage to rally only against the yen, while the traditional risk-on responders, like the Australian dollar (AUD), euro (EUR), and Canadian dollar (CAD), all kicked into gear at the expense of the US dollar.
Any number of fundamental conclusions can be drawn from this dynamic, the most likely conclusion being that the Fed will keep their foot on the liquidity pedal for the foreseeable future until we see sustained 200k payroll figures. At that point, easing measures are likely to back off for good, and only then will the US dollar mount a sustainable rally.
Another possible conclusion could be that the recovery in Europe is now gaining steam and the ReserveBank of Australia (RBA) is likely done cutting interest rates. Whatever the fundamental cause, I can tell you the markets are setting up to sell US dollars based on the second step of my trading process, Elliott Wave analysis.
5 Big FX Moves Shaping up Now
Technical explanations aside, the bottom line here is that if the futures on the US dollar index break below the 81.45 level this week, we can immediately begin targeting the next Fibonacci/Elliott Wave support level of 80.25. This will mean that EURUSD, AUDUSD, and GBPUSD could all rally approximately 200 pips this week, while USDCHF and USDCAD could fall 200 pips.
Guest Commentary: Dollar Index to “Wave” Goodbye to 81.45
What’s in store for USDJPY is more dependent on stocks and bonds, rather than the overall direction of the US dollar, but if the stock market continues to rally and you see the dollar losing ground against currencies besides the yen, that five-year inverse relationship of stocks and the US dollar described above might just still be in play.
I’ll be back next time with some very specific trade set-ups, but until then, remember to “Plan your trade, and trade your plan.”
By Todd Gordon, founder of TradingAnalysis.com