Darshan's Blog

Darshan's Daily Market Ponderings

Monday 7th October, 2009

Has The Dollar Broken Out?...

Afternoon all.

Hope you had a good weekend? As you all know we had a miraculous drop in the US unemployment rate and a severe reduction in the number of non-farm jobs lost in the last month. A drop to 10% and just -11,000 respectively (The market was expecting 100,000+ jobs lost). Pretty astonishing figures right? Well, on Friday - I just wanted to get a note out warning you not to buy based on these numbers - and of course, it was great timing because the market closed in the red that day - falling 200 Dow points from the highs of the day.

So what happened and how did it happen? Well, let's just get one big development out of the way - the USDX not only broke above the 50 day EMA but it has also pierced through $76. This is a significant development and it just shows how dangerous it is to be short against the dollar, whenever we get anywhere near the $74 area. Of course, I warned about this last week, so the move should not have been a surprise. Why did this happen on Friday? Well, the positive numbers - scared the market into thinking that the FED would increase rates sooner rather than later. In other words, the free money train got spooked.

The other interesting development was that as the dollar bears covered, the market started using the Japanese Yen again as their borrowing currency. Why not hey? We effectively saw the biggest drop in the Yen in over 10 years on Friday. Of course, this would no doubt have annoyed the Japanese - who only last week, announced that they would begin QE measures on a three month basis. What an unnecessary bluff - all they had to do (as I said) was let the market get spooked into thinking that the FED would raise rates sooner rather than later, and the Yen would weaken by itself - as it would once become the carry trade currency.

However, I actually think Friday was just another warning shot of what will happen, when the market gets scared. The market doesn't actually care for good news, unless it is believable and sustainable. Unfortunately such a large scale drop in the NFP number, clearly was not believed to be sustainable but still scary enough to worry everyone about the FED raising rates. We're back to 2007 - where bad news is good news (lower rates) and good news is bad news (higher rates). Nevertheless, I actually think they are walking the USDX up to 76.50, where the market will short term bottom and then they can have their Santa rally - without having to have the dollar collapse below $74. In the meantime, they are using the Yen to keep things gently moving along. Clever. So in reality, I do not think the dollar has really broken out. It was a knee-jerk reaction and a neat trick combined. So keep monitoring it.

Anyway, enough of the technical reasons for the behaviour. Let's get down to the numbers. How did the Labour stats show such an incredible and unexpected improvement? Are they reliable enough to reassess the macro outlook? I don't think so and for a number of good reasons. First of all, where did the jobs actually come from? Remember we are in a seasonal period where short-term jobs increase - what will happen post Christmas? Will those part-timers be kept on or will they have to go?

Well temporary help increased by 52,000 jobs in the last month, while professional services increased by 86,000. On the other hand, construction fell by 27,000 jobs and manufacturing by 41,000 jobs. I am not quite sure how these numbers paint the picture of a growing economy - when broken down into those facets. Temporary jobs, mean employers are taking on shift workers to aid them, as and when demand increases - shunning full-time employees - because the cost of taking on the former, is cheaper. Professional services are people like accountants, lawyers and generally what I call "talkers"...which is understandable with so much paperwork needing to be done with all the mess caused by so many banks. However, neither are employees within sectors that suggest that the economy is growing in a sustainable way. You would surely expect increases in manufacturing and construction, if that was the case. Surely, those are the areas that the Government's Stimulus plan is targeting right? So can we feel happy about the stats on Friday? No - not really. So much so, that I fully expect a revision when the next NFP numbers arrive in January. Revisions always worry markets but when numbers shift so much from the trend, they worry the markets even more. The fact is countless trillions have been poured into stimulus - both indirectly and directly - and yet the unemployment rate (officially) is still at 10%. Smoke and mirrors is all I have to say.

Meanwhile back to the markets. We are back in no-mans land - with a drop overnight and now a recovery of sorts. Yet we are still meandering in a range. Which is fine, if you like getting bored all day long. What we need is a break above 1121 on the SPX or a break below 1180 - the former would then target 1130 and the latter would then target 1060. Similarly the Dow is stuck in a wedge, which the bulls need to kill by rising above 10590 but so far, the longer it goes on, the more chance there is of a correction down to 10050 as said many a time over the last week. With the US auctioning off over $180bn in debt this week - now is as good a time as ever to test those lower levels, before we rocket up beginning either Friday or next week.

Stay safe and happy trading!

Darshan

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