Last week, I was all over the weekly cloud cover break in USD/JPY (see chart one), talking about how important it is and why further gains are likely. It is a new month now and we have another important technical break on the monthly chart (see chart 2). USD/JPY closed above its 20-month SMA. This confirms the degree of bullish sentiment in the market right now and reinforces my view that USD/JPY is headed higher for 85.
Over the past 18 years, USD/JPY has CLOSED above its weekly cloud only 4 times (not counting this one) and in 3 out of those 4 instances, a very sharp rally in USD/JPY followed.
1995 break – USD/JPY rose from 97 to a record high above 146
2000 break – USD/JPY rose from 108.50 to a high above 134
2005 break – USD/JPY rose from 108.50 to a high of 124
2009 break – FALSE BREAK
2012 break – ????
Non-farm payrolls dropped by -651K and USD/JPY and the EUR/USD rallied. What is behind the move?
The number of jobs lost in the US economy was 1,000 more than the 650k forecast, but compared to revision in January from -598k to -655k, non-farm payrolls actually rebounded! Here’s another score for the employment component of service sector ISM, which has an 82 percent positive correlation with non-farm payrolls.
With more than 4.2 million Americans out of work since Jan 2008 and the unemployment rate at a 25 year high of 8.1 percent, there is no question that the labor market is weak. This will translate into negative consumer spending and a further contraction in the US economy. Yet going to the NFP report, the whisper number was 1 MILLION. I have no clue where that rumor got started, but unless the January data was revised to +1 Million, there was minimal chance that non-farm payrolls would be that bad. So today’s price action post payrolls reflects the market’s relief that job losses did not hit 1 million. But don’t think that this is impossible because in September 1945, non-farm payrolls fell 1.96M.
In general, the payrolls report will probably not have a lasting impact on the US dollar because it represents the same old depressing story of massive job losses. Weakness in the US economy has been discounted and in many regards, traders are focusing on what’s in store for the next months. A lot of fiscal stimulus is in the pipelines which could help stimulate the US economy and if China comes through with a stimulus for their own country, it will benefit everyone.
Last night, I was on Sky News Australia talking about a variety of things ranging from the Federal Reserve’s policy action, China, the US dollar, the Euro, the Australian and New Zealand dollars.
Here’s the interview:
I also talked to Chip Hanlon of Greenfaucet.com about my new book, Day Trading and Swing Trading the Currency Market – second edition.
Listen to the podcast
The EUR/USD has fallen close to 4 percent or 600 pips since the beginning of the year. Although fundamental factors are certainly in play, there are seasonal factors as well.
Back in December, I published article warning about the seasonal effect on the EUR/USD.
Looks like it is playing out as expected:
One of the new chapters in my book, Day Trading and Swing Trading the Currency Market, Second Edition is on seasonality.
Technical analysis is based on the idea that price patterns repeat themselves and seasonality is rooted from this very same concept.
According to the following chart, over the past 10 years the EUR/USD depreciated in the month of January 7 times. If we expand the chart to include 1997, which I cover in the book, that would be 8 out of 11 times.
Of course, like all technical analysis, the pattern does not always repeat itself which is why we saw the EUR/USD rise in the month of January during 2003, 2006 and 2008.
For an explanation of why there is a strong case for seasonality in the currency market during month of January and for other examples of seasonality, treat yourself to a copy of second edition of Day Trading and Swing Trading the Currency Market
I was one of the few analysts calling for a potential rebound in non-farm payrolls in the month of December (Non-Farm Payrolls Preview: Could We See a Rebound) and that was exactly what we saw this morning. 524k jobs were lost in the US economy, which is modestly better than the -586k revised loss for November. In the past 5 decades, we have seen a rebound every single time job losses topped 500k, and this time it was no different. The employment component of service sector ISM which rebounded last month has once again proved to be one of the most reliable leading indicators for NFP. We have a service based economy and the rebound in the employment component of ISM was a strong signal that we could see a rebound in payrolls. However, the rebound is far more modest than what we have seen in the past and the unemployment rate jumped from 6.8 to 7.2 percent, is the highest level in close to 15 years.
Despite the better than expected number, if you need proof that the US economy is in bad shape, the latest non-farm payrolls report certainly provides it. In the course of 2 months, more than a million Americans lost their jobs, totaling 2.485 million jobs lost in 2008.
We will probably not see the new assault on the US dollar that traders were expecting since NFPs matched expectation, but in the long run the data is nothing to cheer about. An unemployment rate of 7 percent was the big number that everyone was focusing on now that the unemployment rate has exceeded that level, it will force more creative measures of stimulus from the Federal Reserve.
Rebound is a Precursor to More Losses
We have just endured one of the worst strings of job losses that this generation has ever seen and unfortunately the pain will continue. Companies are tightening their belts and are in survival mode. Alcoa and Intel have already announced layoffs. Fourth quarter and first quarter earnings will be very weak. To shore up their stock prices and plan for a recovery, many companies may be forced to announce more layoffs.
The US is in recession and in previous recessions, job cuts have lasted for at least 15 months. So far, we have only seen 12 consecutive months of job losses which means that non-farm payrolls will not turn positive until the second half of the year.
There was nothing good report as the pace of job losses in the manufacturing sector accelerated while average weekly hours and earnings declined.