Is fear an excuse for traders to do what they want to do anyway?
Outlook  Last year we wrote its the pandemic, stupid (as political advisor Carville had said its the economy, stupid). Just as the pandemics effect on economic variables is huge (jobs, inflation), the prospect of recovery is influenced by the rate of vaccinationand now the threat of the delta variant. The vaccination chart shows the countries with the highest vaccination rates, the UK and Canada near the top but the UK having that scary delta outbreak and thus a dip in sterling. The response in FX is not entirely consistent. Canada has a great vaccination rate but the CAD is soft. Australia has been among the strictest of countries, and yet the AUD is resuming its downward trajectory now that almost half of the population is locked down. The falling CAD and AUD may be a judgment on the pace of recovery, not a judgment on the vaccination rates or lockdown policies. We can only guess that risk aversion generally is behind the USDs gains and not specific cases/vaccination rates. This bodes ill for emerging markets and their currencies. If anyone knows whats happening in the dollar/yen, please advise. The dollar has been dropping for a week, which may be due to the standard risk-on yen buying by Japanese managers, and risk-on bolstered by the vast uncertainty surrounding the Olympics, now only weeks away. This makes some sense, but on the 240-minute chart basis, the dollar/yen is oversold and also pressing the bottom of the standard error channel. If we believe in mean reversion, the dollar should recover, but perhaps not fully and then we see a downside breakout. The UK and Israel, two leaders in percentage of population vaccinated, are being called the tip of the spear. But see the chart. The number of cases in Israel is still tiny, even if it used to be zero a few weeks ago. The topmost of those undisclosed reasons could well be the massive infrastructure spending the US is about to undertake, the biggest anywhere in the world, ever. Set aside the trade deficit and the deficitthe US could be on the cusp of the biggest and most sustained recovery since the end of WW II. If this is behind the seemingly growing dollar support, it has to overcome the likelihood that the US gets the delta variant, too, and far worse than the UK and Israel, if only because we have such a high percentage of really stupid people, er, anti-vaxxers. In that case, the dollar wins anyway on plain old risk aversion. Bottom line, the threat of more pandemic is the immediate cause of risk-off on a par with Trump, offset and opposed by the same reflation trade. It cant lose. Short-term effects can come from the high frequency data. We get the Case-Shiller house price index today, along with the June Conference Board June consumer confidence index. Tomorrow brings the ADP forecast of private sector job growth, which Bloomberg puts at a measly 550,000. As noted yesterday, the Case-Shiller numbers are sure to show a scary red-hot housing market and probably more comments from Feds about the need for taperinga finger in the dyke. Similarly, if ADP AND payrolls disappoint again, the dollar rallyette gets stalled. The only thing that could put a lasting dent in the dollar is a really bad payrolls report on Friday. The probability is not zero. We had 559,000 jobs created in May, falling short of the forecast for 650,000 (if better than 278,000 in April). See the chart. This is a Really Very Bad jobs recovery. This time Trading Economics.com reports a consensus forecast of 690,000 and its own forecast of 650,000. Now we have to calculate the difference between expected vs. actual, or the surprise component. At a guess, a shortfall under 650,000 will be swallowed, but not a shortfall under the previous month, i.e., less than 560,000. And in case anyone missed the monthly warning, this is why you really shouldnt trade FX on payrolls Friday. Its pure gambling. This is an excerpt from The Rockefeller Morning Briefing, which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes. To get a two-week trial of the full reports plus traders advice for only $3.95. Click here!