Fundamental Outlook for US Dollar: Bearish

- Despite the draw of a long weekend and questionable long-term implications, confidence is bolstered by NFPs
- Risk appetite proves unquenchable as an otherwise lone manufacturing report drives equities higher
- The dollar closes in on confirmation of a bearish reversal

Despite wading through a docket of otherwise unremarkable and disappointing event risk, risk appetite would find a foot hold this past week and subsequently send the US dollar lower. Looking at the trade-weighted dollar index, we see the single currency fell for four consecutive sessions and closed this past week on the verge of a far more progressive bearish reversal. Is this an inevitable shift in the tides for the benchmark currency after a failed month-long attempt to catalyst a bull run? To determine whether this is the case, we will likely have to look outside the narrow confines of an otherwise light economic docket and turn our focus to the normal culprit for larger trend developments: investor confidence.

Heading into the new week, we should maintain realistic expectations for price action through the first 24 to 48 hours of active trading. The US markets will be closed Monday for the Labor Day holiday. And, though the absence of US institutional money doesn’t force the FX market to grind to a halt; this particular center of finance is heavily influential when it comes to defining global levels of risk appetite or aversion. It isn’t a coincidence that a rally, reversal or stall in the US session is carried over into the preceding Asian and European hours of the following continuous trading day. That being said, there are few foreseeable fundamental swells that can reasonably be expected to spark a meaningful shift in positioning (into or away from risky assets). In fact, the coming week’s global docket is exceptionally light when it comes to fodder that can stir confidence or fear in the more prone corners of the globe. Naturally, we would expect this to translate into a quiet market. Quite the contrary. It is frequently those periods that are lacking for definable economic indicators that see trends develop. A possible reason for this phenomenon is that the threat of volatility from a specific event can curb traders’ interest in building or unwinding trades. When the coast is clear, market participants are more comfortable in taking large positions without the fear of temporary volatility. What’s more, as speculative trends build; the move cannot be brushed off as a asinine and temporary reaction to a specific piece of data.

When establishing the natural bias of investor sentiment over the coming week, we already see the technical lean. The fact that this bearish bias (actually a rise in risk appetite) has developed despite the questionable performance of manufacturing activity (one of the last bastions of hope when it comes to growth) and employment (at the pace of job growth we are running at, it would take five or six years to reach the old level of normal), confidence is still buoyant and the safe haven dollar under pressure. It seems in the absence of panic-inducing events, the natural bias is risk appetite. That being said, important milestones ahead including consumer credit, the trade balance and the Fed’s Beige Book will be reviewed with an optimist’s bias.

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