Market is bouncing
Indeed the week has been a crazy one so far and it is supposed to go even wilder as a major economic event is taking place over the weekend. Monday saw the US dollar losing ground against virtually each and every other currency as Chinese equity markets sell-off spread to Europe and United States. As a consequence, EURUSD reached 1.17 and USDJPY 116 in a move that was destined to scare any possible bull out there for the dollar.
However, market bounced and bounced hard in the sense that EURUSD is back below 1.13 and USDJPY is sitting comfortably over the 120 mark as equities around the world are bouncing back. My trading was on the short side of the US dollar but the expiration dates for the options I took were either end of week or end of month, so there is still a bit of waiting time. So far, results are mixed as the bounce was pretty strong.
US GDP Surprised Markets
US GDP on Thursday took markets by surprise as even the most optimistic forecast has been exceeded as we saw a 3.7% economic growth for the second quarter. You’ve got to keep in mind the global growth conditions we’re seeing all over the world in the sense that growth is really not there and rates like 0.1% or 0.5% are more common. Even China is slowing down. However, despite lower oil prices, US economy is printing a robust growth and this brings back speculations that the Federal Reserve in the United States is going to hike the interest rates at their September meeting.
PBOC Cut Rates
After the wild Monday when Dow Jones and SP 500 in the United States were moving aggressively to the downside, the very next day PBOC (People’s Bank of China) cut the rates in an unexpected move designed to calm markets. Looking from it in retrospective, I would say it worked as the USDJPY is back above 120 level while US dollar is starting to gain traction again. Expect more of the same the closer we get into the September meeting as market volatility should be at elevated levels during that event.
Jackson Hole This Weekend
Jackson Hole Symposium in the United States is supposed to take center stage this weekend as central bankers from around the world are gathering to discuss low inflation and new perspectives. While neither Janet Yellen nor ECB’s Draghi are not participating, it doesn’t mean that the event will turn to be a lull one. Stanley Fischer, the vice president of the Federal Reserve of the United States as well as Carney and Jordan, Governors of Bank of England and Swiss National Bank respectively will make the discussions there extremely interesting.
Global Growth and Inflation
It is worth noting that press representatives are not allowed to take part in discussions but often they are taking interviews during break times and this translates into important information. During Jackson Hole symposium, central bankers are talking global growth, strengths and opportunities for the global economy and this year the focus will be on inflation. Therefore, expect possible volatility on Monday’s opening as market will try to digest what those central bankers are discussing.
Focus Is Shifting To NFP
After the US GDP showed a way bigger economic growth than expected, focus is shifting now to next week’s NFP (Non-Farm Payrolls) event that is supposed to bring more clarity regarding the possible rate hike the Fed is going to make middle of September. This is all that matters and considering the fact that the Fed is focusing on lower levels of unemployment in order to boost inflation, then all eyes are on the jobs data. A strong release next Friday will definitely see USDJPY moving higher and EURUSD lower with the whole Dollar index jumping aggressively in light of a rate hike, while a miss next Friday should see the opposite.
Volatility in September
After all, July payrolls number was pretty solid and as a matter of fact, any print above the 200 levels is considered to be a good number. Lately though, revisions were the name of the game so I wouldn’t be surprised to see previous numbers being revised. This will add to volatility as traders will try to digest the data. Besides the actual jobs being created and unemployment rate being released, the labor participation rate should hold the key for any possible interest rate decision in September. I would say the path of least resistance now is for a lower EURUSD into 1.10 area while USDJPY should move into 123. If that is happening before the Fed September interest rate decision, then most likely there will be no hike.