Traffic Jam

Well, that was another impressive day from the dollar.   Although the euro and yen were only tepid participants in the dollar rally, most other currencies good a good old-fashioned tail whipping from George Washington.  The two prices that Macro Man has been fixed on recently- USD/CAD and GDX- were really in the cross-hairs, delivering chunky moves up and down, respectively.

On the face of it, there was no obvious fundamental catalyst.  To be sure, the ADP survey was weak, but equities were already down (and fixed income already up) before the release.  Then again, the orders and services ISM were both pretty strong...but if we were to ascribe dollar strength to that, shouldn't we have expected yields to be higher?

The answer, of course, is that in the short run positioning and sentiment are equally if not more valid catalysts than the so-called fundamentals.  And while it may seem obvious on occasion how and when those factors will influence markets, the reality is that when you assemble a large cohort of actors with different objectives, speeds, and/or utility functions, things can move in strange ways.

In this, markets are kind of like another mass assemblage of humanity, namely highway traffic.   Perhaps the several hours' worth of taxiing children to and from sundry activities before writing this has left Macro Man with traffic on the brain, but the analogue is an interesting one.   For example, did you know that many if not most traffic jams do not have a "fundamental" cause such as an accident, roadworks, a car stopped on the side of the road, etc.   Rather, it is the erratic nature of drivers themselves who cuase snarl-ups (yes, tailgating morons on I-95, I'm talking about you.)

The video below is a wonderful example of how so-called "phantom" traffic jams occur:



Now imagine they were all short USD/JPY or USD/CAD....

With payrolls on Friday the market is likely to be in "keep it tight" mode.   One might posit that the quicker  fingers will already have pulled the trigger on stopping out of short dollars, so perhaps today will be one of consolidation.  Anecdotal evidence suggests that Macro Man was hardly the only one to have the idea of going long USD/CAD, so yesterday's rally clearly had some new longs replacing some old shorts in the positioning matrix.  Still, given the straight line nature of the decline, you'd have to think that it would take more than 48 hours to normalize things.   The 38.2% retracement level, for example, is at 1.33.

And if you're inclined to be sceptical of emerging markets here (just look at USD/TRY last night after Erdogan enrolled in the Vladimir Putin Academy of Democracy)...just consider the kinds of traffic jams they have in China!