The Currency Strength Flip You Can’t Ignore

I can always tell that the market has been volatile because the currency strength meter numbers flip dramatically. 

On Friday just gone the VIX spiked its head above 20 for the first time since June, all down to the poor NFP numbers. In particular the revised figures which saw the 3 month average plunge to just 36k. 

The market didn’t see it coming.

The VIX rallied, Stocks plunged and the USD nosedived. 

But that’s in the past.

What now? 

This week we see the release of the ISM Services PMI as well as the Unemployment claims out of the U.S. Both data points are now becoming very important. 

The ISM Services PMI is one of those reports you can’t ignore. If it’s above 50, it means the services sector (the backbone of the U.S. economy) is growing. Drop below 50, and we’re talking contraction. This survey taps into around 300 purchasing managers who have their finger on the pulse of business conditions like hiring, new orders, and prices. These people can’t afford to be wrong; their jobs depend on reading the economy right. If this number disappoints, it could be bad news for stocks and hit the U.S. dollar hard.

Unemployment claims could also add further pressure considering the market's sensitivity around the latest revised figures from the Non-Farm Payroll report. 

Jerome Powell last week told the market that a cut would have been too soon considering the sticky levels of inflation. Two members of the Federal Reserve dissented wanting cuts to come. Since that meeting the jobs numbers through a spanner in the works.

Now the market is pricing in cuts again for September. 

Let’s highlight some numbers and put them into context. Before the NFP data the market probability of a rate cut by the Federal Reserve in the September meeting stood at 63.1%. After, well it rose to 96.1%. 

The market believes this data will push the Federal Reserve into cutting interest rates in the September 17th meeting. 

Now we have lots more data between now and then including another NFP, so this ‘flippin’ back and forth could become a new norm in the short term. 

Cutting rates could be bearish USD and positive for stocks, so the rebound we are seeing today makes sense. 

When dealing with high volatility markets, the currency strength meter can become a little skewed. Let’s have a look at the latest figures:

As we can see the USD moved from -1 to +7 because many of the majors made new highs or new lows in favour of the greenback. 

The EURO and CHF seem to have come off the worst with both currencies falling. 

The JPY however seems to be the big winner swinging from -5 to +5 in just one week, showing that it gained strength. 

This was all down to the swings in volatility. 

However, I still feel that this can be valuable. It shows that in the short term it may be ok to follow the strong vs weak. But we should also do this with caution. Reduce risk perhaps or trade on a lower time frame. 

One consistent throughout this though is the GBP weakness. Now moving down to -5 the GBP is the weakest currency and it’s being backed up by the data. The Bank of England is forecast to lower rates on Thursday 7th August which could fuel further selling for now. 

Volatility swinging could be normal considering we are in the summer months of trading where moves can be notorious. Remember that when the VIX spikes it could lead to some interesting opportunities. GBP weakness seems to be the only stable of the currency strength meter and has a fundamental driver behind it. 

Stay safe out there traders!