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USDUS500

Trader thoughts - US payrolls in sight but its US CPI that interests

Chris Weston
Head of Research
7 Jul 2022
We’ve seen some heat coming out of the USDX as it tested 107, yet on the 4hr or daily, I’m yet to have a sell signal and maintain a long bias.

That may change, but for now the rate of change (ROC) is positive and the 3- & 8-EMA are yet to cross, and price holds above both ST averages.

EURUSD stalls into 1.0150 and the risks of a modest unwind of a large EUR short position is high ahead of US payrolls (22:30 AEST) – here, the market expects 268k jobs, an unchanged U/R of 3.6% and earnings of 5% (from 5.2%) – The strong rally in equities may be called into question if we get a hot jobs number, which sounds odd, but I think the bulls want to see number below 100k, to show signs the labour market is cooling and monthly average earnings below 5% could see buyers of US Treasuries and subsequently push the NAS100 higher.

(Source: Pepperstone - Past performance is not indicative of future performance.)

Coincidently, for those who like seasonals, check out the performance of the NAS100 through July – it literally doesn’t go down or at least we’ve seen positive returns each July since 2008.

We see a similar set-up on the NAS100 as we do crypto, which may not shock, but we’re looking for a break of the 27 June swing – Bitcoin is almost there, and for the momentum traders, we’ve had a bullish 3 v 8-day EMA crossover, ROC is positive, and the Bollinger Bands have narrowed sufficiently to make believe we could see a breakout and increased momentum – perhaps even a trend.

(Source: TradingView - Past performance is not indicative of future performance.)

AUDCHF has seen a solid move higher and EURAUD shorts are working well and eye a test of 1.4766. EURCAD is trending and while we could see retracement, they should be shallow and I like this lower too.

One concern I have on the risk front comes next week with US (June) CPI (out Wed 22:30 AEST) – while there are many signs that inflation has peaked, it, unfortunately, won't roll over and the word ‘plateau’ is more appropriate. The market sees US headline inflation lift 1.1% MoM, taking the year-on-year print to 8.8% (from 8.6%). What makes this messy, is that core CPI is expected at 5.8% (from 6%). I see the market as more sensitive to headline inflation, and the risk is that this comes in just above consensus, which is the trend we’ve seen in each inflation release since March 2021 (except January 2022). For the quants out there, if we look at how the NAS100 has performed in the six hours after the US CPI drops, we see the index has fallen every time (except for January 2022) by an average of 0.7% - they say history doesn’t repeat but it rhymes.

A big CPI number should solidify expectations of a 75bp hike from the Fed in the 27 July FOMC meeting. The market is pricing that firmly and another 50bp in September. Buying USDs on a hot CPI print is tough when the market is long of the buck and so much is already priced, for me the easier trade is to keep shorting commodities as higher rates mean lower demand.

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