Chart Of The Day: Trading The Beaten-Down Dollar, Pre-Nonfarm Payrolls

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The dollar has taken a hit today on multiple fronts. First, both the euro and the pound gained against the dollar on Brexit hopes. Then, the yuan bounced from a decade low after China’s leadership signaled further stimulus.

In further tough news for the dollar, investors rotated out of the security of Treasuries, back into a significant equity rebound. Back in August, overseas investors bought over $60 billion of US government bonds, the most in three years, which weighed on yields. Yields are now rising for the third day, mirroring the global stock rally, as investors repatriate capital, increasing pressure on the dollar.

Finally, the dollar reached its highest level since the preceding peak in mid-August, meeting a line of supply, forming a resistance to any further rise.

But despite the USD’s latest hit, it’s possible the currency may rally on tomorrow’s Nonfarm Payrolls report. Economists expect the US Labor Department’s monthly release to show 190,000 new jobs for October, up from last month’s 134,000 figure. Yesterday’s ADP report showing 227,000 new jobs for October, beat the 189,000 estimate in addition to September’s NFP, lending support to positive expectations for tomorrow’s data.

And while a positive NFP jobs added forecast is important for the dollar, savvy traders know to pay more attention to less conspicuous components of the release, such as average hourly earnings. That metric is expected to rise to 3.1 percent from 2.8 percent in the previous month. This has a more direct impact on prices as well, since better paid workers tend to spend more, increasing demand. Thus, those numbers typically have a longer lasting effect in the current market environment compared to the jobs added portion of the NFP.

As the market eagerly anticipates a positive labor report tomorrow, what can FX traders expect it all to mean for the dollar going forward?

Chart Of The Day: Trading The Beaten-Down Dollar, Pre-Nonfarm Payrolls

DXY Daily Chart

The Dollar Index wiped out two days of gains today, confirming the resistance of the shooting star formed on August 15. The RSI has been providing a negative divergence – as momentum weakened on the advancing price – since it completed a double top after reaching the most overbought level since November 2016. Today’s weakness established another double-top, reaching the oversold level of 70, falling below the October momentum peak.

The dollar’s inability to stand its ground above the August 15 peak, amid weakening momentum, confirms that day’s oversupply signal generated by the shooting star. Therefore, a correction is likely toward the bottom of the rising channel since the February bottom, where the 200 DMA adds support.

Concurrently, should the dollar follow through with this short-term correction, it will have eased its drag on gold. Contracts on the yellow metal seemed to have completed a successful return move, confirming the integrity of an ascending triangle bottom, indicating that it’s ready for a rally.

Trading Strategies

Conservative traders should wait for a correction to enter a long position, along with the mid-term and long-term uptrends.

Moderate traders may enter a short upon a rally retesting the 97.00 level, with a close stop-loss above. They may take further caution, waiting for a lower close, with at least one long, red candle engulfing a preceding green or small candle of any color. Then, risk-savvy traders would wait for a rally to allow a close entry to the stop-loss that would include all the price action while providing sufficient opportunity for a reward.

The following trade samples provide identical entries and exits. Their risk differs on price action confirmation.

Trade Sample:

  • Entry: 97.00, after following the price action described above.
  • Stop-loss: 97.20
  • Risk: 20 pips
  • Target: 95.00, round psychological number
  • Reward: 200 pips
  • Risk-Reward Ratio: 1:10

Aggressive traders may short any time, or wait for a rebound for an entry closer to the 97.00 level, where supply is presumed to form a resistance.

Trade Sample:

  • Entry: 97.00
  • Stop-loss: 97.20, above yesterday’s high point.
  • Risk: 20 pips
  • Target (NYSE:TGT): 95.00, round psychological number
  • Reward: 200 pips
  • Risk-Reward Ratio: 1:10

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