"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Friday, June 3, 2011

Employment Data undercuts US Dollar

This morning's abysmal US payrolls data caps off a 'weak' in which economic data releases confirmed that the US economy is headed for a "double dip". A pitiful 54,000 jobs were supposedly created in the month of May with the unemployment rate moving up to 9.1%.

While we market watchers and traders have come to expect news like this to drive off the risk trades and send safe haven flows into the US Dollar, no such thing happened. I mentioned earlier this week that the Dollar's tepid response to the weak ADP numbers was interesting and beared watching. Looking back that was now a harbinger of things to come.

What has apparently happened is that the US economic data has become so rotten, that traders are not moving money into the US Dollar even on news that otherwise would have driven safe haven flows in its direction. The reason is simple - market players are now convinced that the string of consecutive poor news is leaving the hawks at the Fed with no arguments for their case and has brought the doves there into the ascendancy. In other words, interest rates in the US are going to be forced to stay at ultra low levels for a long time to come and while QE2 is coming to an end this month, further monetary accomodation is coming forthwith. At least that is what the market is attempting to signal to the Fed as to its wishes.

The news initially caused a sell off in stocks taking the S&P futures below important chart support near the 1300 level. It has since recovered and moved above it as I write this but as to how it is going to fare the rest of the day is unclear. A close below this level and the stock market chart gets even uglier. A stock market that enters a bearish downtrend is going to be at the forefront of the minds of the FOMC as they consider their next move on the monetary front.

BAck to the Dollar however. It is now trading well below the 50 day moving average and has fallen back below all of the major shorter term moving averages as well. The 10 dma has made a bearish downside crossover of the 20 dma and both look to be getting ready for a bearish downside crossover of the 50 dma. In short, the technicals have completely soured for the greenback and it is once again flirting with the 74 level on its daily chart. A breach of this level that sees the Dollar close underneath it and it is going back down to 73, a level which is extremely, and I do mean, 'extremely' critical from a technical support level.

Meanwhile the combined weakness in the Dollar along with true safe haven flows into gold, is pushing the metal back up and away from its chart support near $1530. If it can claw back towards $1550 and push through that level, it is going to make a run towards $1575 very quickly. The key will be the $1550 level.


  1. Great, helpful post Dan. Thank you!

  2. Dan, is it possible that the USDX is remaining weak because money is flowing into other currencies and Treasuries rather than the USD? In the past year it has really seemed like it takes an economic "crisis" type of outlook in the markets to get the USDX to rally; otherwise the USD has failed to catch much strenght, the events in MENA being the primary example that comes to mind first.

    Also, wouldn't silver and gold be rallying harder(at all in the case of silver) if the market was truly anticipating QE3 now?

    Your posts are among the best on the net and I appreciate them in their entirety! Cheers!

  3. I do not entirely disagree with your assessment of the dollar, however, I take certain issues with it. If people were entirely abstaining from investing in dollars because of Fed QE expectations you would see a further rally in the precious metals/the commodity complex. Also, you also have to remember Europe's core produced substantially better economic numbers than those posted in the US and there was more affirmation of a Greek (and by proxy) peripherals bailout. The Euro/Dollar reflects this reality.

    The report was not without positive caveats - such as the return of many to the labor pool (to be counted as unemployed). The non-mfg also came out today better than expected with a slight (and probably later to be revised) uptick in employment.

    Personally this market strikes me as incredibly droll, if not stupid as people stumble to react and re-react to news that is stale. The market seems to have the memory of a goldfish swimming around a tank full of piranha with its fins over its eyes. Perhaps this is just the hot money running around in the low yield environment.

    Nonetheless, I largely agree with your views. Monetary policy will remain accommodating and QE3 looks more likely with each passing bad data point. But on real news of further Fed loosening the belly of the curve screams higher (and doesnt regress like we are seeing) and the commodity complex explodes higher.

  4. did dying dollar save market from flash crash city today???

  5. Maradona;

    I cover this to a certain extent in this week's interview on the KWN Weekly Metals Wrap. the big funds are buying Aussie bonds, Kiwi bonds, Canadian Dollar Bonds and even Euro bonds to a much greater extent than US Dollar backed government bonds. There is no yield in the latter and little hope that there will be anytime soon.

  6. Thanks Dan, I just listened earlier and took note. Maybe that's why we're only seeing the USDX rally on severe severe severe worry in the markets; no other currency market is big enough to handle the influx of demand.



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