Will The Mighty Dollar Break Out This Week?
Jay Hawk | Jul 30, 2014 05:33AM ET
The world of forex is once again in slow motion leading up to the first Friday of the new month, a Judgment Day of sorts. No, Armageddon is not in the near term, and the Book of Revelations never revealed any truths about foreign currency pairs, but the release of employment data by the Department of Labor has become a respected day of reckoning, at least for traders. Someone should check the Mayan calendar to see if they mentioned a flat-lining of market activity in 2014 and when it might end.
During these summer doldrums, however, the event risk surrounding this important data release is about the only thing that can budge any market from its sluggishness. In just the past week, the Euro has had two ranging days below 20 pips, something that has never happened since its creation, but forever the optimist, most analysts are truly expecting something to break the ice this week. With second quarter GDP, the FOMC, and Friday’s infamous NFP release, there should be cause for celebration.
But for now, it’s time to hold onto your seats or keep your powder dry or choose whatever metaphor conveys caution before a storm. One only needs to look to the options market to determine a strangeness in the wind. Implied forex volatilities for major pairs for the month have dropped to low single digits, which is not a call for alarm, but actual volatilities are even lower. Yet the US Dollar has been on a tear of late, rising like a star, as the accompanying chart below reveals:
The USD Index typically forms very well-defined channels, as depicted by the dotted green lines on the chart. The sudden launch of white candles has been dramatic, but there have been few articles that noted this sudden resurgence. A few weeks back, it bounced off the lower channel boundary, blasted through its 2013 year ending valuation, and has now been hugging the upper Bollinger Band for several trading sessions. This silent march of appreciation has been steep, steeper than a 45-degree angle, which is a situation that terrifies most analysts. However, shorting the Dollar has not been vogue, although shorting the Euro seems the rage at the moment.
What has been voiced is that this week could be stellar for the mighty buck. Looking first back to implied versus actual volatilities, we have the Euro – 4.5% versus 3.1%; the Pound – 4.6% versus 2.5%; and the Yen – 4.9% versus 3.5%. According to one analyst, “It partly reflects fear that volatility may rise sharply. It may also partly reflect dealers reluctance to take on the risks and costs without getting compensated.” Yes, profit margins have been squeezed to the breaking point. Something has got to give.
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First quarter negative GDP results caused heartburn all around, due in part to a horrific winter, but expectations are that the second quarter will literally blow the socks off any notion that that a recession is in the works. Ms. Yellen is not expected to announce anything earthshaking related to policy changes. Bond purchases may be cut again by $10 billion per month, but the choice of adjectives and adverbs in the Fed’s statement will tell the real story. That leaves payroll and inflation data on Friday as two elephants on the trading floor.
Sooo, will the intrepid greenback assault the ramparts and break on through to the other side, a kind tribute to Jim Morrison of the Doors who did just that in July of 1971? Or, must we bear through another sluggish month while Europeans vacation on the Mediterranean and we homebodies try to make a buck at forex?
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