The idea of the dollar smile theory is pretty much this:

But amid the unwinding of the carry trade since Friday, there is something worth noting about the dollar under these circumstances. The global selloff proved that even with risk aversion in markets, the dollar struggled for the most part. So, what gives?

As the boom meets a bust, traders are getting a reality check. The carry trade mostly depended on this one thing. Traders were borrowing yen at low interest to buy risky assets i.e. US stocks mostly. That’s the simplest way to put it. So, the BOJ hiking rates plus the yen surging led to a double whammy which shook markets since Friday.

That is not to mention with all the panic surrounding the state of the US economy with markets suddenly wanting to believe that the Fed has to step in with emergency rate cuts. Pfft.

So, looking at the state of things, markets are now figuring out the one thing that can really hurt it the most. And that is when leverage gets out of control and come back to bite at investors.

A flight to safety during such an event typically should bolster the dollar’s standing but considering the circumstances, the dollar seems to be the one caught on the opposite side of the unwinding too. It doesn’t help when the solution for investors is to go kicking and screaming, and asking help from the Fed.

Taking that as a case in point, the dollar smile theory may yet have changed to a dollar frown theory – at least for now:

That being said, with the Fed poised to cut rates, it will also keep a lid on any outsized dollar rally from hereon. But a more robust economy in general will at least keep the dollar in good standing and not exercise the Fed put too quickly.

But if other parts of the economy start to show more warning signs like the labour market, the dollar might quickly find itself in hot water once again.

And to pile on the misery, it will also trigger worries about the outlook for US stocks. In turn, that might bring us back to the episode from last Friday and this Monday again. That especially if USD/JPY also continues to plunge alongside a declining equities market.

In the normal case of risk aversion, the dollar is a comfort for traders in general. But when we’re now caught in the storm of the carry trade unwind, the dollar really needs a strong economy to work for it in order to stand its ground.

This article was written by Justin Low at www.forexlive.com.

The big question circulating in investors‘ minds must probably be whether the recent market moves are just a foretaste of a larger downturn or simply a temporary correction.

The answer delves into the reasons for the sudden change in market sentiment. Once the latter is understood, it may become clear whether the same scenario will repeat itself.

Let’s start by saying that a prevailing theory is that investors suddenly fear that the US is headed for a recession, given the continued weakening of the labor market.

Similar news in the past would have sparked optimism by suggesting that the Federal Reserve might tighten monetary policy. But now, fears of a hard landing have surfaced.

However, Monday’s ISM services PMI data, which showed an increase of 2.6 points to 51.4 in July, cast doubt on the worst-case scenario (a deep recession).

Another factor cited by the media was the pullback in technology companies due to downbeat earnings reports and a generally uncertain outlook.

But there could be another element at play: a global margin call.

The trigger was the sudden strengthening of the Japanese yen, driven by the Bank of Japan’s more hawkish stance, which recently raised its interest rate to 0.25%.

In addition, the BOJ pledged to halve its bond purchases, reducing them to about 3 trillion yen ($19.9 billion) by the first quarter of 2026. In other words, goodbye Abenomics…

As a result, USD/JPY fell sharply to 150. It seemed that this was precisely the Bank of Japan’s target. So, how could this move have impacted international markets?

The problem is that investors have long been borrowing in the Japanese yen because of its lower rates, investing in assets in countries with higher rates, and engaging in carry trades.

With the Bank of Japan’s policy change, those borrowed in yen suffered losses, leading global investors to liquidate their positions in foreign assets and buy yen instead.

This led, on the one hand, to a massive sell-off of risky assets and, on the other, to a further strengthening of the yen. In other words, we witnessed a global margin squeeze.

Interestingly, the strengthening of the yen has had very adverse effects on other major markets worldwide in the past. So, such a phenomenon has occurred before.

What is the verdict?

Beyond macroeconomic indicators and geopolitics, investors will now closely monitor the yen. Thus, we can see a more emotional move in the coming days or even weeks.

The big question now is whether the Fed could call an emergency meeting or whether the recent improvement in market confidence will make them hesitate to take urgent action.

This article was written by FL Contributors at www.forexlive.com.

The recent events
in the markets reminded me of a great tip from the legendary investor Stanley
Druckenmiller. For those who don’t know him, he averaged 30.4% return per year
for 30 years with not even a single negative year.

In an interview he
was asked about what made him so successful in the markets and his answer was:

“Having an open mind.
I never get married to a position. I’ve had positions where I was sure I was
going to hold them for 2 years and a week later I didn’t have a position and I
was short. Because conditions change. If conditions change, you have to move immediately.
That was true 20 years ago and it is 10x now with the internet and everything.”

To explain this
concept better, I will use a recent example with the Nasdaq (this is of course hindsight analysis but it’s good for educational purpose).

Last Wednesday, after
a strong selloff caused by the deleveraging of the Yen carry trades, the market
started to bottom out going into the BoJ decision. At one point it looked
like the worst was behind us as the Nasdaq broke through key technical levels
and rallied almost 5% in a single day.

Unfortunately, the following day we got an ugly ISM Manufacturing PMI which
sent the market into risk-off and defensive positioning into the NFP report. The
US Jobs report worsened everything as the data surprised to the downside with
unemployment jumping to a totally unexpected 4.3% rate. The losses extended and
eventually we got a strong overnight selloff yesterday as the Nikkei crashed 12% in
a single day causing a global market rout.

In the bigger picture, there were certainly good reasons to expect a rally last week and eventually even a new
all-time high. But we can see from the chart above that the ISM Manufacturing
PMI was the catalyst for the selloff, and once the price fell back below the key
19400 zone, the bearish momentum increased.

In that case, conditions changed.

This is when you should take countermeasures to protect your capital.

You
could have closed out a long position altogether or you could have reduced your
risk if the conviction in your trade remained strong. In any case, it was the time to adjust and not getting married to your original idea.

This article was written by Giuseppe Dellamotta at www.forexlive.com.

Fundamental
Overview

The weak US NFP report last Friday led to a key breakout in
the USDJPY pair which eventually triggered another deleveraging in the Yen
carry trades. Things got dire yesterday as the Nikkei dropped 12% overnight and
we saw a general selloff in global stock markets.

This led to risk-off flows
and at one point, the markets saw the Fed cutting rates by 136 bps by year-end
and some chances of an emergency rate cut. Although the volatility calmed down
a bit, the markets are still expecting a 50 bps cut by the Fed in September and
a total of 110 bps by year-end.

The NZD got pressured by
the risk-off sentiment but bounced back pretty quickly erasing all the losses
since last Friday. On the monetary policy front, the last RBNZ policy decision weighed on the Kiwi as the central
bank changed slightly its language to a more dovish leaning which increased the
rate cuts expectations.

Tomorrow, we get the New Zealand
Jobs report and if we get weak data, the market will likely increase the
chances of a rate cut at the upcoming meeting which at the moment stands at 35%
probability.

NZDUSD
Technical Analysis – Daily Timeframe

On the daily chart, we can
see that NZDUSD spiked back lower to the April’s lows at 0.5850 yesterday but
eventually erased all the losses. The buyers are clearly stepping in around the
0.5850 level to position for a rally back into the 0.6050 resistance.
The sellers will need the price to break below the 0.5850 level to increase the
bearish bets into the 0.5770 level next.

NZDUSD Technical
Analysis – 4 hour Timeframe

On the 4 hour chart, we can
see that we have a minor resistance zone around the 0.5980 level where the
price got rejected from several times. The buyers will want to see the price breaking
higher to increase the bullish bets into the 0.6050 resistance next. The
sellers, on the other hand, will likely continue to lean on that minor
resistance with a defined risk above it to keep pushing into new lows.

NZDUSD Technical Analysis – 1 hour Timeframe

On the 1 hour chart, we can
see that we have mostly a rangebound price action with the price now trading in
the middle of the two key levels. There’s not much to do here other than
waiting for the breakouts or some catalyst. The red lines define the average daily range for today.

Upcoming
Catalysts

This week is basically empty on the data front. The only notable economic releases
will be the New Zealand Jobs report tomorrow and the US Jobless Claims figures
on Thursday. The market will also pay close attention to Fed members’ comments
given the latest developments in the markets.

This article was written by Giuseppe Dellamotta at www.forexlive.com.

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Notable
Spikes and Crashes

In
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Stable
Sector Activity and Central Bank Impact

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This article was written by FL Contributors at www.forexlive.com.

Many forex traders have experienced positives from basic automated robots, but advanced ‚bots take profits to another level. This guide explains powerful algorithms and strategies and how combining top automated solutions boosts success.

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This article was written by FL Contributors at www.forexlive.com.

Here’s a snapshot of things:

• S&P 500 futures -3.0%
• Nasdaq futures -4.6%
• Dow futures -2.1%
• Russell 2000 futures -5.3%

At one point, Nasdaq futures were down over 6% so the rout in tech shares is at least not getting much worse for now. It’s a full-fledged flight to safety mode with traders chasing the usual safe havens. Bonds are bid and so is the Japanese yen and Swiss franc. Besides that, it’s pretty much a sell everything else case in broader markets to start the week.

From earlier:

• Japan’s Nikkei closes down by a whopping 12% to its lowest since November last year
• Volatility is back with a bang
• From soft landing to crash landing
• Poll: Is the Fed behind the curve on cutting interest rates?
• A reminder of the one thing that traders have been getting wrong since last year

This article was written by Justin Low at www.forexlive.com.

The VIX has more than doubled in value today, rising to hit the 50.00 mark now. That’s the highest level since the pandemic and this is the biggest daily jump since February 2018, when there was the whole fiasco involving the XIV and a broader market selloff amid a rout in the bond market at the time.

In any case, the heightened reading we’re seeing above speaks to the fear and angst that is gripping markets right now. For a while there, it looked like we might’ve settled into a period of low volatility. The VIX had before this touch its lowest since before the pandemic as investors were feeling rather confident about broader market sentiment.

How quickly the tables have turned in just one week, eh?

Emotions are running high now and this is a testament to that. The rout in equities will stop when it stops. However, the renewed volatility means that it will at least take a while for the nerves to settle down again. As for market players, it means needing some time to regain their grit and vigour in the short-term.

That translates to a likelihood that we’ll see a more bumpy road in equities moving forward. At least definitely not the one-way traffic in the first seven months this year.

This article was written by Justin Low at www.forexlive.com.

Fundamental
Overview

At one point it looked like the worst was behind us as the S&P 500 rallied
almost 3% on a single day following the BoJ and FOMC decisions.
Unfortunately, the following day we got an ugly US ISM Manufacturing PMI which sent the market
into risk-off and defensive positioning into the US NFP report.

The US Jobs report didn’t help as the data
surprised to the downside with unemployment jumping to a totally unexpected
4.3% rate. The losses extended and eventually we got a strong overnight selloff
today due to spillover effects as the Nikkei crashed 12% in a single day.

The market is now pricing in 125 bps of easing by year-end which translates
into a 50 bps cut in both September and November, and a 25 bps cut in December.
The market is even seeing small chances of an inter-meeting cut. Things are
moving quickly.

S&P 500
Technical Analysis – Daily Timeframe

On the daily chart, we can
see that the S&P 500 broke through the major trendline around the 5435 level where we had
also the 38.2% Fibonacci retracement level for confluence. The sellers piled in more
aggressively as the buyers folded. We are now seeing a bounce on a previous
swing low level around the 5200 level.

This is where we can expect
the buyers to step in with a defined risk below the level to position for a
rally into the 5400 level. The sellers, on the other hand, will want to see the
price breaking lower to increase the bearish bets into the 5000 level next.

S&P 500 Technical
Analysis – 4 hour Timeframe

On the 4 hour chart, we can
see that we got a fakeout last week when the price broke above the 5540
resistance and then dropped back below it as the US ISM Manufacturing PMI
missed expectations by a big margin. There’s not much else we can glean from
this timeframe as the buyers will just look for a bigger bounce, while the
sellers will look for a break below the 5200 level to extend the drop.

S&P 500 Technical
Analysis – 1 hour Timeframe

On the 1 hour chart, we can
see that we have a minor downward trendline defining the current bearish
momentum. The buyers will want to see the price breaking higher to increase the
bullish bets into the 5400 level, while the sellers will likely keep on leaning
on it to position for a break below the 5200 level. The red lines define the average daily range for today.

Upcoming
Catalysts

This week is basically empty on the data front. Today we have the US ISM Services
PMI and on Thursday we get the latest US Jobless Claims figures. The market
will also pay close attention to Fed members’ comments given the latest
developments.

This article was written by Giuseppe Dellamotta at www.forexlive.com.

• Prior -0.2%

Looking at the breakdown, there was an increase in prices for intermediate goods (+0.1%), energy (+1.6%), capital goods (+0.1%), and non-durable consumer goods (+0.1%). The price for durable consumer goods was stable on the month. If you strip out energy prices though, the prices for the total industry would’ve only reflected a 0.1% increase in June.

This article was written by Justin Low at www.forexlive.com.