There is always the risk in the markets of getting caught up in the noise and missing the signal. Today’s signal seems loud and clear, especially to those who piled into risk trades in the currency markets on the assumption that recent correlations would hold true ( and even strengthen) on a day when the S&P 500 broke free of resistance and tacked on 2.5%.
USD/JPY has been the best behaved of the risk trades, strengthening a correlation that has weakened in recent weeks. EUR/USD was the real surprise, ramping up to 1.4290, as one would expect, before sliding back within pips of session lows from the just shy of 1.43.
The signal I am picking up is that the dollar is showing strength, boosted by some potential improved fundamentals. What are those?
- Improved economic growth (home sales), Goldman forecasts “only” -300,000 NFP for July
- hopes that the US budget may not balloon further if health care reform is halted or modified to a more affordable package,
- rising bond yields as a result of hopes for an economic rebound
- and hints from Dallas Fed’s Fisher that the Fed could consider halting its QE policy before reaching its stated targets of well over $1 trln.
It’s summer and the markets are thin, machines are dominating the flows and many are on the beach. maybe I’m reading too much into one day’s price action, but it is interesting price action indeed and cannot be ignored.
EUR/USD trades at 1.4205, USD/JPY at 95.15 and EUR/JPY at 135.15.
