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After NFP beats expectations, the US dollar index makes a new high for 2021!

The week is finally over and what a week it was. There were several central bank decisions, a blow-out jobs report, and some decent market moves to capitalize on. Most notably the Bank of England has fallen out of favor with the markets, and the RBA has shown that they have lost control of their yield curve control idea. The Fed didn’t really convince anyone that they had a firm framework in place but at least they followed through with their forward guidance.

Market Wrap

Earlier today I made a video describing how I expected the GBPNZD to continue falling as the RBNZ had recently raised rates, which is supporting the NZD in contrast with the Bank of England that yesterday disappointed the markets and put pressure on the pound. So far the outlined strategy is working and I think we see more downside in this currency pair.

Looking at the ActivTrader sentiment indicator most traders on the platform do not agree with my analysis and are currently feeling some heat.

The US dollar index spiked through a resistance level today and also a double top, which to me suggests that there is a high probability that today’s price move was a liquidity grab, taking the stops that resided up there around $94.50. Today’s NFP number was very good and boosted by a revision upward of the previous month.

On Wednesday Fed Chair Powell described how the 2-part mandate that the Fed had was clearly not being met as prices were not stable, and the labor force figures were not showing max employment. He mentioned that 550K-600K a month for the next 6 months would do a lot to restore the jobs market to pre-pandemic levels and get participation up. This would then allow the Fed to initiate lift-off for rate hikes. The US dollar obviously liked a good NFP number that beat expectations, but the debt markets are signaling something else to me.

The TLT tracks the 20-year iShares ETF and long bonds. This is clearly rising higher and away from the old support/resistance level. This then made me wonder what the US10Y and Eurodollar futures were doing?

Today’s action in the Eurodollar futures markets was centered around the December 2022 and 2023 contracts and they are clearly rising since the FOMC meeting.

The US 10-year benchmark yields are dropping. This is going to weigh on the US dollar which had been going higher as markets were pricing in for rate hikes and now, they are potentially signaling that they don’t believe higher interest rates are coming anytime soon. The other possibility or additional reason for Treasuries and Eurodollars to go higher is that there is a massive need for the highest quality collateral which is generally Treasuries. Today's NY Fed RRP was again above $1.3 trillion and above the previous operations. This is where the money managers and banks lend the Fed cash overnight in return for some collateral and interest payments on the cash.

This is great for the precious metals as a weakening US dollar, a depreciation in the US 10-year yields, and TIPS means there is likely to be a move into gold.

Gold is back above the $1800 /oz level and there is a clear triple top for the gold bulls to target. Around that level, I expect there to be some stop orders for the traders looking for shorts back down below $1750. If they get triggered there could be an acceleration higher in the gold markets, which is sustained by lower yields.

A reduced yield could also be the markets believing that inflation is about to drop from its highs as we’re seeing commodities come off their highs as well as things like the dry ship index. Bottlenecks and COVID disruptions have created supply shocks and the market could adjust and get inventory off containers and into the shops and businesses. The rising NFP could be a sign that the citizens who made themselves unemployed due to childcare commitments or who were fearful of returning to work have now decided to get back into the workplace. It could also show that those who were relying on the government stimulus cheques now need to return to work.

If inflation worries are diminishing the Nasdaq is likely to keep rising.

Today’s price action in the Nasdaq printed another new all-time high but the run-up could do with a correction to find value as things are getting very babelicious. The rising daily 20 & 50 ema’s would be a great place for the markets to pull back into, before continuing higher into the Santa Claus rally.