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Making Sense of USD Rally, Dow Selloff Post NFP

  • Kathy Lien
  • 8 February 2020

Making Sense of USD Rally, Dow Selloff Post NFP

Daily FX Market Roundup Feb 7, 2020

Many investors are scratching their heads about why US stocks fell sharply after this morning's non-farm payrolls report. Some media outlets blame the move on concerns about China's economy and profit taking after a strong week. However a deeper look into the details of the jobs report quickly reveals underlying weakness. The unemployment rate was expected to stay at 3.5% but it rose to 3.6% and most worryingly, wage growth missed expectations. With the Chinese economy slowing, this is the first sign of similar trouble ahead for the US economy. Federal Reserve officials have expressed little concern about the impact of coronavirus but fear can be a powerful driver of consumer and business demand.

Currency traders on the other hand drove the US dollar higher against all of the major currencies with the exception of the Japanese Yen which held at pre-NFP levels. The dollar rises when there is risk aversion so the move is consistent with the sell-off in stocks. However the relative stability of USD/JPY is a sign that while investors are worried about the global impact of coronavirus, they believe the US economy will fare better than others. For now, the jobs number changes nothing. Monetary policy will remain unchanged as the Fed waits to see how world growth is affected. According to the White House, based on the past and what they are seeing, a drop of 0.2% is expected. Its likely to be far more than that, but with strong Q4 earnings, it could take Q1 warnings to cement the top in stocks and turn USD/JPY.

The most important report on next week's calendar will be US retail sales. If consumer spending slows, red flags will be up and investors could be scared into deeper profit taking. After hitting record highs this week, we look for a steeper pullback in equities in the second week of February. For currencies, this means a near term top for pairs like USDJPY and USDCAD.

The currency hit the hardest is the Australian dollar which fell to a 10 year low Friday. Investors were not pleased by China's decision to delay trade data - a sign that the numbers could be too ugly to publish. Even if it is only moderately weaker, the government could be worried that it will trip further selling. Dovish comments from RBA Governor Lowe didn't help. The central bank lowered their GDP forecast in response to the bushfires and coronavirus to 2% from 2.5% for the year ending June 2020. Lowe said if the economy were to hit a rough spot, easing is an option. The New Zealand dollar fell in sympathy as investors look forward to similarly cautious comments from the Reserve Bank of New Zealand next week.

Meanwhile USD/CAD is flashing signs of a top. Unlike the US, job growth doubled expectations in January with an increase of 34.5K compared to 17.5K forecast. The unemployment rate also dropped to 5.5% instead of rising to 5.7% as expected. Wage growth jumped to 4.4% from 3.8%. IVEY PMI rose to 57.3 from 51.9, a sign of improvement in manufacturing. Despite the central bank's cautious outlook, these are very good numbers and given USD/CAD's recent rally, profit taking is due. There are no major Canadian economic reports to threaten this move in the coming week, making it a low risk trade.

Euro and sterling both extended their losses. German trade and industrial production numbers were very weak while sterling fell victim to a rising dollar. Fourth quarter GDP numbers are due from both in week ahead, so EUR and GBP will be in play. 

 

 

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About the Author
Kathy Lien
Kathy Lien is Managing Director and Founding Partner of BKForex. Having graduated New York University’s Stern School of Business at the age of 18, Ms. Kathy Lien has more than 13 years of experience in the financial markets with a specific focus on currencies

Ms. Kathy Lien is Managing Director of FX Strategy for BK Asset Management and Co-Founder of BKForex.com. Her career started at JPMorgan Chase where she worked on the interbank FX trading desk making markets in foreign exchange and later in the cross markets proprietary trading group where she traded FX spot, options, interest rate derivatives, bonds, equities, and futures.

In 2003, Kathy joined FXCM and started DailyFX.com, a leading online foreign exchange research portal. As Chief Strategist, she managed a team of analysts dedicated to providing research and commentary on the foreign exchange market.

In 2008, Kathy joined Global Futures & Forex Ltd as Director of Currency Research where she provided research and analysis to clients and managed a global foreign exchange analysis team. As an expert on G20 currencies, Kathy is often quoted in the Wall Street Journal, Reuters, Bloomberg, Marketwatch, Associated Press, AAP, UK Telegraph, Sydney Morning Herald and other leading news publications.

She also appears regularly on CNBC’s US, Asia and Europe and on Sky Business. Kathy is an internationally published author of the bestselling book Day Trading and Swing Trading the Currency Market as well as The Little Book of Currency Trading and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game all published through Wiley. Kathy’s extensive experience in developing trading strategies using cross markets analysis and her edge in predicting economic surprises serve key components of BK’s analytic techniques.