USDCAD best positioned for NFP volatility while S&P 500 gives in to seasonality

S&P 500, Dollar, Recession, NFP and USDCAD talking points:

  • The business perspective: S&P 500 bearish below 4,075; USDJPY bearish below 134.00; USDCAD Bearish below 1.3100
  • The S&P 500 advanced for a fourth consecutive session, but the pace leaves much to be desired – a hallmark of seasonal drift
  • The main event risk on Friday is the June shift in NFPs, but my main interest isn’t EURUSD or USDJPY pushing multi-decade highs for the greenback


The S&P 500 continues to climb but on seasonality rather than enthusiasm

The S&P 500 recorded its best daily charge in two weeks during the last session, but the context has not changed. There remains a distinct lack of enthusiasm, whether based on volume, open interest or fundamental basis. And, although the June NFPs are available for Friday morning during the New York session; major event risk is unlikely to provide a meaningful platform for a sustained bullish transition. When the outlook is defined by rapidly tightening financial conditions and the growing certainty of a recession, there is a critical disconnect with building a sustainable uptrend. Nonetheless, the SPX led other risk measures in a rebound that lasted four consecutive sessions. This corresponds to the longest period of gains for this “risk” benchmark dating back to November 8e – although even with the 1.5% gain from the last session, this is the least productive four-day load of this period.

Chart of the S&P 500 with 50-Daily SMA and 4-Day ROC (Daily)

Chart created on Tradingview Platform

While there are a number of explanations applied to the rise of the S&P 500 this week, I believe most of those that defy the overall trend and fundamental landscape are ex post facto justification. It is more likely that the rise we have seen this week is the result of seasonal expectations. Historically, this week sees the lowest volatility (via VIX) of the entire year. In turn, subdued fear opens the market to opportunism, leading the underlying S&P 500 to its second-best weekly performance of the calendar year (after the first week of trading when capital is redeployed after the collection of end-of-year losses). At 2.0% so far, this is not a roaring endorsement of a bull market rally against such strong expectations.

S&P 500 Weekly Performance Chart

USDCAD best positioned for NFP volatility while S&P 500 gives in to seasonality

Graphic created by John Kicklighter

UK Prime Minister’s resignation and recession fears regain the upper hand over rate forecasts

If you are looking for more persistent trend development, it is better to seek a more reliable fundamental source than to simply rely on seasonality to challenge larger currents. There are plenty of fundamental sparks, but nothing that really registers as fostering an inherent uptrend. In the past session, news of British Prime Minister Boris Johnson’s resignation appeared to bolster the pound and the FTSE 100 as it eased uncertainty in London markets; but it is unlikely to provide a clear trend of these regional strengths let alone a definitive move globally. A more universal theme is that of global growth prospects. There was a notable rebound in crude oil and a modest jump in copper in the last session; but that does not replace the erosion of these key commodities in recent weeks, the result of a plummeting demand picture amid recession fears. The US 2-10 spread (10-year treasury yield spread minus 2 years) is still inverted and there is no legitimate sentiment survey that indicates we are past the worst. In my own survey of traders asking what they thought was the likelihood of a US recession by the end of the year, 37% said it was a 75 chance. 100%, while a collective 68% think this is a better than equal case scenario.

Survey asking traders how likely a US recession is

USDCAD best positioned for NFP volatility while S&P 500 gives in to seasonality poll, @JohnKicklighter

As we sort out the main fundamental driver – and we should always have a view of the dominant theme in the broader market at some point – I will continue to watch the greenback as a useful gauge. Whether we are assessing relative interest rate expectations, growth potential or risk appetite; this primary currency will provide a view. It is this evolving fundamental role that makes the dollar’s gains all the more remarkable. Through Thursday’s close, the DXY trade-weighted dollar index was essentially unchanged, keeping the currency’s gains over the week at an impressive 2% gain, matching the gains more important since the pandemic. This ascent pushed the market to its highest level in two decades, but there is an even more impressive technical milestone that has been surpassed with this relentless ascent: a break from the 38.2% Fibonacci retracement of the historical range of the dollar from 1985 to 2008. Many – even among techies – are unlikely to recognize this landmark, so the follow-up born of recognition is doubtful. Still, if we have a sudden bout of risk aversion or the Fed’s rate outlook is charged, this metric is certainly positioned to take advantage.

DXY Dollar Index Chart (Quarterly)

USDCAD best positioned for NFP volatility while S&P 500 gives in to seasonality

Chart created on Tradingview Platform

Friday Top Event Risk and my favorite conduit for volatility

Given my constant focus on risk trends and interest rate expectations, it stands to reason that the next monthly US jobs release (and the more wide) Friday morning in Washington holds serious potential. For context, the forecast for June nonfarm payrolls (aka NFP) is 268,000 net jobs added in the US economy. We didn’t have an ADP private payroll report to base the forecast on, but the decline in initial jobless claims and the ISM component of service-sector labor suggest the risk is on the downside. . How the market reacts to data is more dependent on how the Fed reacts to news. If the US economy has created more jobs than expected, the improvement in the economic outlook will be modest at best; but it will certainly justify the Fed’s commitment to go ahead with aggressive rate hikes – a boon for the dollar and a serious threat to the S&P 500. Alternatively, if the report misses significantly, erosion economy may do little to bolster hopes that the central bank will abandon its fight against inflation. There is a strong bias for a greater reaction to a “disappointment”.

Chart of US NFPs with level of “surprise” between expectations and actual results (monthly)

USDCAD best positioned for NFP volatility while S&P 500 gives in to seasonality

Chart created by John Kicklighter with BLS data

While I will definitely be watching risk trends when the US jobs report comes out, I think there is a more balanced opportunity for a US dollar response. While EURUSD and USDJPY are pairs that are at the top of my watch list in general for the third quarter – the former for the convergence of monetary policy forecasts and the latter more a reflection on risk trends – my primary focus for this data release will be USDCAD. There is no multi-decade bias in favor of the greenback for this crossover. On the contrary, it has been remarkably attached to a wider range. In addition, we are expecting Canadian employment data for June at the same time as its US equivalent. This doesn’t necessarily equate to support for a clear trend, but it certainly adds to the risk/potential for volatility. This is at least one pair to watch.

USDCAD Chart (Daily)

USDCAD best positioned for NFP volatility while S&P 500 gives in to seasonality

Chart created on Tradingview platform

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