Morning Comment: Is volatility going to creep into the currency markets as well?

It really is amazing how the much the market can move on a piece of economic data. In fact, it’s a bit ridiculous sometimes…given that some of the data we get is quite questionable. For instance, every month, the employment report has something in it called the “birth/death rate”…which is (at best) a guesstimate…and can change the nonfarm payroll number dramatically. Also, other pieces of economic data should not come-in any different than the estimates. Let’s face it, all economists know how the CPI and PPI numbers are weighted…and they have a very good idea of how much those prices have moved in a given month. (When it comes to commodities, they know EXACTLY how those prices have moved.) Therefore, we wonder how those inflation numbers could ever be more than a tiny difference from what the consensus is looking for each month!

HOWEVER, since the market DOES move in response to these numbers…sometimes in a major way…ignoring them would not be a good idea at all. To a degree, it’s kind of like technical analysis. Some pundits believe it’s a waste of time, but since the market DOES react to technical analysis, those who ignore completely put themselves at a disadvantage. (Besides, technical analysis is fundamentally based…but that’s a discussion for another time.)

Tomorrow, we get the CPI data…and Wednesday we get the PPI numbers. Therefore, even though everybody knows how much commodities moved in August…and how much home prices and rental prices moved during the last month…we could get a very large reaction in the marketplace IF those numbers somehow come-in a lot differently than the Wall Street consensus is looking for. With this in mind, today could be a rather quiet day in the markets…and investors and traders wait to see these all-important inflation numbers.

The futures are trading higher this morning, so we are seeing a bit of upside follow-through from the late week bounce we saw last week. The weaker dollar is getting much of the credit for this bounce, but we have to remember that the correlation between the dollar and the stock market is a VERY uneven one. Yes, a weaker dollar…if it becomes a trend…can have a positive impact on the earnings of multi-national companies. However, a weaker dollar is also bullish for commodities…and given that inflation is such an important issue for the markets right now, a weaker dollar might actually be the last thing the stock market wants to see.

Either way, we do see the dollar falling further. As we highlighted last week, the dollar had become extremely overbought and sentiment for the greenback had become extremely bullish. Therefore, we said, the dollar had become ripe at least a short-term pullback. Sure enough, it did indeed begin to decline last week…and that drop has spilled over into this week. More importantly, this further weakness has given the DXY dollar index the kind of negative cross that we worried about last week. Since a negative MACD cross has been followed by decline of about two weeks or more over the last year, it looks like we should see more dollar weakness going forward this time around as well.

That said, we do need to point out that some of those declines in the last year have not been significant ones. Yes, some HAVE been fairly pronounced…but even those have not been enough to change the upward trend for the dollar. HOWEVER, given how crowded the “long dollar” trade had become this summer…it is quite likely that a lot of leveraged investors will get caught offsides by this move IF it continues for a while. Therefore, this one just might be something that turns into a surprising decline.

We’ll be watching the 50-DMA on the DXY dollar index. That moving average has provided strong support for the greenback in recent months, so any significant break of that line could cause some meaningful pain to some currency traders. However, we will definitely have to see something more than just a slight drop below the 50-DMA to worry about those currency traders. The DXY dropped slightly below that line in August…only to bounce-back rather quickly. (The same was true in January and February of this year.) Therefore, we will have to see the kind of drop below the 50-DMA that becomes a significant one…and lasts for more than just a few days. However, if it does drop below that line in a material way, we’ll be able to add the currency markets to the growing list of asset classes that are experiencing elevated levels of volatility. And when more asset classes are seeing acute levels of volatility, it means there is an increased chance of a UFO (an UnForeseen Occurrence.)

Finally, we’d just like to say that our thoughts and prayers are with all of those who were impacted by the horrible attacks on 9/11 twenty-one years ago yesterday………….They say that time heals all wounds, but we know that some wounds can never be completely healed.

Matthew J. Maley

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

275 Grove St. Suite 2-400

Newton, MA 02466


Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.

Posted to The Maley Report on Sep 12, 2022 — 8:09 AM
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