Friday, July 6, 2012

What in the world happened in the markets yesterday?

What in the world happened in the markets yesterday?

While all eyes were on the ECB yesterday, the EU’s central bank needed to share the spotlight with what seemed like every central bank in the world. The ECB cut its Interest rate to 0.75% from 1.00% and its deposit rate to 0.0% from 0.25% in order to offer cheap money for banks and provide potential monetary stimulus options. The ECB wasn’t alone as central banks in China, the UK, Denmark, and even Kenya were slashing rates or adding to their asset purchase programs yesterday. Simultaneously, the US issued better than expected ADP Employment and Initial Claims figures as a prelude to today’s Non Farm Payrolls figures.< p> The big surprise wasn’t the news as much as the market’s reaction. The ECB’s actions and subsequent statements from Chairman Mario Draghi led the Euro much lower with the EURUSD falling over 150 pips to a low of 1.2360. Also, equity prices failed to advance on the news with German, US, and French stock indexes all lower.

So what triggered the fall?

While central bank stimulus in the past could be expected to trigger a risk rally, after seeing these rallies fizzle quickly in the past, Forex traders are beginning to take a more realistic view of the world; IE-“if things weren’t bad, the central banks wouldn’t be getting involved.” The key for the future isn’t how much stimulus is being thrown towards the world but is it working? Therefore, we can expect to see stronger emphasis in on economic numbers in the near future.

Non Farm Payrolls

This all brings us to today’s Non Farm Payrolls figure. Regardless of yesterday’s employment optimism from the ADP Employment and Initial Claims numbers, the Non Farm Payrolls could go either way. Therefore, taking pre-NFP trades would be considered a crapshoot. Even after the figures are out they could be interpreted in two ways. A bad number could trigger an overall risk selloff and lead the dollar higher, or the dollar could tank as Forex traders bet on Fed creating inflationary policies. The opposite scenario could occur for a positive figure.

So what to do? Look for trends

Currently, the EURUSD has been building a base above yesterday’s lows of 1.2360 while finding resistance at 1.2400. As such, a break below 1.2360 could trigger additional selling as buyers at current levels jump ship. Similarly, if the EURUSD manages to trade and hold above 1.2400 it could short covering.
Elsewhere, Forex traders should keep their eyes on some of the outperformers of the week, specifically the Aussie. While falling yesterday, the AUDUSD is finding support above 1.0200 as demand has been building at those levels. As such, if we do see an NFP risk rally take place, the Aussie will be expected to be a leader again.

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