Why The Bottom Fell Out Of The Dollar, And What You Should Expect Next
It’s All About The Fed … and The Data?
When it comes to the Fed and the dollar it’s all about the data. The committee has said time and time again through one Chairman after another that it is data dependent. It was just the other day I was saying in a post on this website that the FOMC is not know to be preemptive or to front-run events. If the data doesn’t support a policy change there is no policy change and the data doesn’t support a policy change, at least not yet.
That is why I was among the most surprised when the FOMC raised rates in a surprise move earlier this week. The committee cut rates by 50 basis points, effectively two cuts in one, and they may not be through. If history is to repeat itself as it has so many time in the past, now that the committee has made one emergency rate cut it is likely to cut again and maybe as soon as the meeting in two weeks.
The result of the cut has been widespread. The dollar fell against the basket of world currencies sending the DXY deeper into reversal. Now trading at a one-year low the index is in danger of falling below key-support. Key support is at the $95.50 level, a break of which could send the dollar crashing. The risk for traders is the virus. The rate-cut and dollar decline are driven by the virus and nothing else, once the sickness passes these moves are likely to end.
Likewise the data. Today’s non-farm payrolls report gives no indication of economic weakness or the need for a rate cut. Ironically, the reason for the rate cut is to ensure this situation doesn’t change. The headline NFP came in 100K above consensus at 277,000 and upward revisions to the tune of 85,000. The unemployment ticked lower even as the number of workers in the workforce increased. Wages, the best gauge of economic health, rose 0.3% for the month and are up 3.0% YOY.
Gold Is Getting A Boost, New All Time Highs Are In Sight
Gold prices are among the only to be moving higher, other than bonds that is. The spot price of gold is struggling with resistance in today’s action but the bias is bullish. Weakening dollar values and the flight-to-safety trade are only part of the picture. The underlying fundamentals of gold were bullish before the FOMC rate cut, not those fundamentals are super-charged. If the FOMC cuts rates again in two weeks, or even just indicates dovishness, gold prices could surge again. Resistance is currently at the $1,675 level, a break above that would bullish. If not we may be dealing with a double-top.
