In a stunning move for US dollar bears, the markets reversed Friday’s NFP lows like the news was not even released, and the USDJPY is now well above the 120 level and holding ground. The EURUSD reversed all NFP gains and threats to break the 1.08 to the downside again.
What could be the explanation for such moves, and where could we look for clues? The answer is a tad complicated.
First of all, Friday and Monday had a lot of European banks that were closed due to the Easter holiday. This means liquidity was simply not there. When banks in major countries are closed then the only thing moving markets is represented by the retail traders and Algo’s (robots that trade automatically based on previous human programming).
Algo’s trade around the clock, and are more effective when banks are on holiday as even the slightest movement is visible in markets.
Once all traders, institutions, and retailers came back online into the trading arena, reality kicked in and the US dollars gained across the board starting with Tuesday’s London session.
This would be one explanation.
The second explanation could be that the actual NFP number from Friday was too weak, coming in at the lowest levels since 2009. However, one trading day later – on Monday, the ISM non-manufacturing PMI in the United States came in line with expectations.
The thing to note here is that the ISM has an employment component, and that showed a healthy employment level. This brought into question the validity of Friday’s NFP result and a lot of market participants started to price in a revision to the upside in the coming month.
Moreover, and maybe the most important factor out of all listed above is represented by equities and what makes them move.
Equities move higher in a low-interest-rate environment and lower in a higher interest rate environment. That being said, after a lower than expected NFP number on Friday: chances for the Fed to come and raise the interest rates at the June meeting dropped significantly. As a result, stocks moved higher at the opening on Monday, dragging the USDJPY up as well.
After that, it was only a matter of time until a real squeeze on the whole dollar index began.
Moving forward, I expect the current moves to continue into the end of the week’s trading. That being the case, I will be looking for USDJPY to start moving towards the 122 area, USDCAD to break the 1.26 area to the upside, and EURUSD to possibly find a bottom around 1.07.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
