Market Direction Mid Week Update©

Market Direction: BEARISH alert issued 8/10/2017

Is the better than expected GDP enough to stop a market decline?

August jobs data due on Friday will be the first potential catalyst of many in September that could either revive a sliding U.S. dollar or clear the way for further weakness, analysts said.

The dollar on Wednesday registered some gains, thanks to a weakening euro and supportive U.S. data on Wednesday, including ADP’s private-sector employment numbers and revised second quarter gross domestic product data.

And while economists warn of reading too much into ADP numbers as a bellwether for other data, they have set a positive tone ahead of Friday’s nonfarm payroll and unemployment data. Still, the ICE U.S. Dollar Index DXY, +0.09% a measure of the currency against a basket of six major rivals, is down more than 9% since the end of 2016.

“It is now all down to Friday’s official nonfarm payrolls report,” Fawad Razaqzada, market analyst at Forex.com, wrote in a note on Wednesday. “If this also shows further strength in the labor market and another rise in wages then calls for a December rate rise may increase, triggering further dollar buying interest.”

The dollar’s long-running weakness is widely attributed to mixed data, gridlock in Washington, and geopolitical uncertainties, including tensions with North Korea. A resurgent euro has also taken a toll on the dollar as investors anticipate the European Central Bank will soon outline a plan to begin winding down its bond-buying program.

Meanwhile, the dollar has tended to slump during periods of geopolitical uncertainty, leading investors to wonder if the currency has ceded its role as a haven. The dollar index dropped to its lowest level since January 2015 early Tuesday after North Korea’s firing of a missile that traveled through Japanese airspace triggered a global flight to quality assets.

“It seems the combination of an expectation for a dovish-leaning Federal Reserve normalization process, soft U.S. dollar policies, White House instability and geopolitical tension are all contributing to the U.S. dollar’s departure from its traditional safe-haven status,” Joel Kruger, currency strategist at LMAX Exchange said on Wednesday.

That said, it would be hard to imagine a scenario in which the dollar wasn’t able to rally on the back of a deterioration in sentiment, given the U.S. remains the largest and safest economy in the world, Kruger said.

Analysts appear split between calling a turning point for the buck given the Federal Reserve’s expected unwinding of its $4.5 trillion balance sheet and hopes for a rate increase amid improving data, and those staying set on the euro to finish the year stronger due to a more stable political environment and faster economic growth. The jury is still out, but the potential catalysts are plenty.

See: Here’s what propelled the euro above $1.20

Fed policy makers are due to meet Sept. 19 and 20.

Besides employment numbers, manufacturing data is also due on Friday and could help paint a rosy picture of the U.S. economy. Further into September, showdowns over the federal budget and debt ceiling could add some headline risk to the dollar. Even if the debt ceiling will be raised, some posturing from political figures is likely, which would make for a volatile buck, market participants said.

See: Failure to hike debt limit could be ‘more catastrophic’ than Lehman collapse: S&P

Meanwhile, the renegotiation process of the North American Free Trade Agreement between the U.S., Canada and Mexico is due to enter its second round on Friday, after the first round was marked by aggressive rhetoric from the U.S., including tweets from Trump suggesting the pact should be terminated. The Mexican peso USDMXN, +0.2111%  dropped in response against its northern neighbor, suggesting that headline risks are geared toward the peso and the Canadian dollar USDCAD, +0.1901%

See: What currency analysts worry about as Trump threatens to scrap Nafta

Over in Europe, expectations that the European Central Bank could address the prolonged strength in the euro following its Sept. 7 policy meeting are mounting. If ECB officials talk the euro down, this would lend more support to the dollar’s recovery.

The euro EURUSD, -0.0757%  hit a 31-month high of $1.2073 on Tuesday, before retreating below the $1.20 market again. It last traded at $1.1907.

“There is some concern about potential ECB intervention,” Alvin Tan, currency strategist at Société Générale, said. The euro’s historical average is around the $1.21 mark—higher than where it currently trades—but central bankers are likely more worried about the pace of the shared currency’s appreciation rather than its value, Tan added.

See: Currency war talk restarts after Jackson Hole

Also on the calendar next month, German elections are set for Sept. 24. Chancellor Angela Merkel is widely expected to win another term. But her most serious opponent, Social Democrat Martin Schulz, is also a pro-European Union candidate, leading market participants to dismiss the potential election result as nothing to worry too much about.

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The all-time lows since our initial recommendation to go SHORT this market. Here is how the markets have performed:

Stock Market Direction Recommendation (8/10/2017)
Dow	down 243.67 points a 1.12% gain	8/21/17
Nasdaq	down 39.68 points a 0.64% gain	8/21/17
S&P 500	down 20.86 points a 0.86% gain	8/21/17

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