The week so far has been building up to NFP as the Fed has a dual mandate for maximum unemployment and price stability. So far, their policy has not got employment back to pre-pandemic levels, in fact, we’re still around the late 1970s in terms of the labor participation rate. Europe and Australia are both showing signs of weakness due to the coronavirus which could mean the Pound and Dollar are the cleanest of the dirty shirts today.
As a reminder to myself more than anything else, if you have made money already this week, don’t hand it back on a Friday. There is nothing worse than doing well for 4 days, even if it were a grind, to then hand it back on the last day of the week just to ruin your weekend. Fridays are notoriously bad days for retail traders and IMHO there are reasons for this. The first Friday of the month is Non-Farm Payrolls, which in years gone by has been a massive range extension day. Over the last couple of years, it could be said that it is more of a damp squib of an event, which generally takes the stops to the upside, then the downside, and then comes to rest back where it started. And here lays the problem for retail traders. The market has been waiting for this event all week, so the forex markets have been relatively quiet. Most traders are aware that today is a risk event and there will be some volatility, which equals possibilities. The undoing of most traders is that they see the big breakout of the day or maybe weeks range, take the directional trade, only to have it reverse on them, whip them into the opposite direction to then frustrate them as it lands back where it started. The other Friday to watch out for is the 3rd Friday, as options expiries add a larger amount of volatility into the mix.
The last 3 months have seen payrolls rising but not by enough for the Fed to see “substantial progress”. Today’s expectations are for payrolls to increase by 870k, but the surveyed analysts have a band of numbers that range from 350K to 1600k. Anything around consensus I believe will give us a slight pop in the USD before the whipsaw. Anything over 1.6mil jobs and we get a big move in the US dollar higher, with the reverse happening if we’re anywhere near the low estimates. ADP this week was half the consensus so it could be a bad day for the US dollar, though it should be said ADP is not a great predictor of NFP. Just be careful!
The Reserve Bank of Australia governor Lowe laid out how the Australian economy gets back on track. He was quite explicit in saying the quicker everyone gets vaccinated the less economic damage will incur. He also explained that the RBA considered delaying the tightening of Asset Purchases, which may have spooked the market.
The AUDUSD is grinding in the rising channel with the previous market structure acting as solid resistance. Things don’t look great for the AUDUSD as rising channels generally break to the downside and if we get a good NFP today, the rising US dollar will be detrimental to AUDUSD longs.
The heatmap has inversed today from the rest of the week, as the AUD & NZD are the two weakest currencies at the London open. The stronger US dollar today could be traders positioning themselves ahead of the data or unwinding their positions from the week so far.
The weakening EURUSD could also be the main catalyst for traders moving into the US dollar. Today German industrial output data unexpectedly dropped for the month of June.
This marks the third consecutive month of contraction and compared with market expectations of a 0.5% growth. The usual story of bottlenecks, supply chain disruptions, and employment are causing Europe’s largest economy to slow, which does not bode well for the euro.
Also going against the euro is the fact that 76% of retail traders are bullish on the EURUSD. The ActivTrades sentiment indicator is proving to be a great contrarian indicator and while these bulls increase their positions ahead of the US NFP I will be looking for short opportunities until they get stopped out.