Doubts And Fears Still Loom For The Dollar

Lior Alkalay - Contributor - Forex

Growth momentum is back in America? That is what investors believe after the positive surprise from the latest US GDP release. The second US GDP release for Q4 2015 was revised higher to 1% from 0.7%. Core PCE Inflation was also encouraging, reflecting a 1.67% rate of inflation. But while data from the last quarter has certainly been less anaemic, Dollar bulls shouldn’t pop the champagne just yet. Doubts over the current quarter continue to exist. Risks still loom and hurdles need to be cleared before we get another move higher.

What Looms On The Dollar?

Of course, I continue to reiterate that the Dollar’s long-term trajectory is still up. However, there are soft patches along the way because even the US economy can’t always perform well. And when those soft patches occur the FX market will be filled with doubt and the Dollar will dip again.

Then, when once again it becomes clear the US economy is still the outpacing its peers, confidence will return. And with that, we will get another bullish wave. But as long as there is doubt the Dollar will find it hard to break into new highs.

At the moment, despite the upward revision for US growth, we are still in the doubt phase. Because, well, let’s face it, albeit important, Q4 ended two months ago. The data releases for the current quarter are much more important and that is what is sparking investors’ fear.

Several high profile sentiment indicators, e.g. the composite PMI, the NY Empire State Manufacturing Index and even the ISM non-manufacturing index, all plunged.

Chart of Composite PMI
Chart courtesy of

Now, not all of the latest data is dismal. In fact, while business is looking weaker the consumer is looking stronger. The latest Retail Sales reading showed growth of 3.4%, certainly an uptick. Moreover, consumer confidence, while lower than a month ago, is still north of 90 and points on optimism.

Chart of U.S. Reatail Sales YoY
Chart courtesy of

Since the US consumer is the largest segment of the US economy, it is, of course, the most important. But this brings us to the upcoming risk we face. For the consumer to keep the economy on track and for investors’ doubt to fade, the latest positive trend ought to continue. For the US consumer, it’s all about confidence and confidence is code for jobs, specifically non-farm payrolls. Last month, non-farm payrolls hit 151k, which was lower than expected but still considered positive.

But the upcoming release? That might be a different story. One weak reading could simply be noise. But two weak readings in a row? Well, that might be a trend. And that means that, like many times before, coming into this Friday’s non-farm payrolls, there’s a lot at stake.

Friday’s Non-Farm Payrolls Could Be Choppy

Investors expect Non-farm payrolls to come back big time and surge above the 200K mark once again. There is some logic to that expectation. As we can see from the chart below, we are at the bottom of the range. And as history has shown, the NFP reading has tended to jump back up, most of the times. And that might be the case for this Friday.

But then again, it might not. Since expectations are all ready for an uptick back above 200K, there is little room for surprise. Considering that at the present the US consumer is holding everything together, a miss on Non-farm might not be well received. If that’s the case, investors’ doubts will cast an even bigger shadow on the greenback.

Chart of U.S. Non-Farm payrolls
Chart courtesy of

What’s The Game Plan?

For those who have been riding the Dollar for a while and can stomach short-term pain, nothing has changed. Those who can handle volatility in their holdings and have a long-term horizon could use a disappointment to buy Dollars cheap. Because, of course, the Dollar is the only currency left standing.

Then there are those traders keenly watching for the right time for re-entry into the Dollar bull market. Or perhaps you’re a trader with a higher sensitivity to volatility. For those traders, unfortunately, the message from our last review hasn’t changed. Our advice is still to sit it out.

But unlike my last Dollar analysis, while the risk is higher, there’s also the chance for a resumption of the trend. Because if Non-farm payrolls do, indeed, surge north of 200K again, doubts over the US economy will fade. And with that, we’ll see the silver lining for a renewed Dollar rally.

Look for my post next week.

Lior Alkalay Contributor - Forex

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from for their opinion.