The Dollar's Underwhelming Week Was Consistent With On-Going Trading Range

 |  Includes: FXE, SPY, UUP
by: Dr. Duru

Last week was supposed to be a dramatic week with a whole host of pronouncements from the world's major central banks, the aftermath of the Jackson Hole confab, and major economic numbers like the U.S. jobs report. Instead, after the dust settled, the U.S. Dollar index (NYSEARCA:UUP) ended the week right where it closed the previous week.

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The dollar's attempt to break out comes right back to earth in one move

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The trading range is sloppy, but it remains well intact

In particular, Friday's jobs report was supposed to provide markets with definitive guidance on the Federal Reserve's likely move regarding tapering. That "certainty" would in turn set the dollar off on its new trend. Instead, both the reported 169K increase in nonfarm payrolls and the 152K increase in private nonfarm payrolls failed to meet "expectations." I tend to ignore these expectations because they are false anchors: it is never clear whether the gap between actual and reality is a function of a truly weak/strong report or just a measure of the difficulty in forecasting these numbers month-to-month.

I took interest in the report's breakdown of job growth. For example, retail trade and health care experienced growth while information declined. Information declined thanks to a sharp drop of 22,000 jobs in the motion picture and sound recording industry. (Could it be this large decline was the bulk of the surprise? Employment in this category was relatively flat a year ago.)

More importantly, the Bureau of Labor Statistics reports that an uptrend is on-going for "…food services and drinking places, professional and business services, and wholesale trade." Auto manufacturers put 19,000 more people to work in August after laying of 10,000 in the prior month. They have added 34,000 jobs in the past year. On the disappointing side, the June and July numbers were revised downward to the tune of 74,000 total jobs.

The swirling mix of good and bad news provides no additional clarity on what the Federal Reserve might do. There is plenty in the report to justify any assessment. This mix was reflected in trading. The U.S. dollar weakened sharply in the immediate aftermath of the announcement. By the time the U.S. market opened for stock trading, the U.S. dollar had almost regained its composure. The 5-minute chart of EUR/USD shows this indecision.

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The euro's volatile ride to a gain against the U.S. dollar on the day

In the end it was geo-political news that provided the decisive catalyst. After headlines went out regarding more Russian challenges to U.S. plans to strike Syria, the S&P 500 (NYSEARCA:SPY) dropped quickly and took the U.S. dollar with it.

The dollar's weakness in the face of such news and/or in the wake S&P 500 (intraday) weakness continues to attract my attention. The chart below juxtaposes the euro (NYSEARCA:FXE) with the S&P 500 during Friday's trading day. The euro has been weakening since August 21st, so its ability to trade higher here against the dollar is particularly notable. Notice how the euro gained at two key moments: 1) the plunge from the open to a little after 10am (Eastern), and 2) just ahead of the S&P 500′s slip downward into a weak close in the final hour of trading.

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The S&P 500′s loss continues to be the euro's gain

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This all adds up to a continued lack of trend for the U.S. dollar. It is a strange set of affairs ahead of what should be considered a major change in monetary policy. While day-to-day the U.S. dollar index remains prone to sharp swings, it still seems that overall the market is content to wait for the Fed to act before defining a new trend.

Be careful out there!

Disclosure: I am long SSO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long SSO calls; in forex, I am net long the U.S. dollar and net short the euro.