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!

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Anonymous
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May 5, 2016 at 7:11 AM ×

"Mathematical Society of Traffic Flow" ?

Words fail me

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2and20
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May 5, 2016 at 9:31 AM ×

Love the traffic video. It's all chaos theory. Tried and failed to find a chart that I'm sure is either in "Chaos" by James Gleick (a fantastic popular science book on the subject) or in "Nonlinear Dynamics And Chaos" by Steven Strogatz, the best, most enlightening and easiest book from my physics degree course...really worth a read if you actually want to learn the subject. Much easier than you think to get a good grasp of the subject and make some cool graphs with simple algorithms!

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Polemic
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May 5, 2016 at 9:51 AM ×

Bang on theory MM re Chaotic interference from multiple time lagged inputs.

For the simpletons, like me , who don't need tons of maths, one of my fave books is https://www.amazon.co.uk/Critical-Mass-Thing-Leads-Another/dp/0099457865 traffic flow a good part in it.

As for Markets. If everyone is convinced that China commodity spike and blow off is now OBVIOUSLY going to lead commodities back into the pit then it's time to buy again. I loved anon comments yesterday re oil production lags and todays oversupply being reflective of yesterdays production and not today or tomorrows.

Path of pain from her? commodities turn higher and equities scream up. I'm not saying they will and am pretty confused as to what happens from here but that's the way I'd be calling the pain.

Pol

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Anonymous
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May 5, 2016 at 10:01 AM ×

pol- regarding pain trade- given pretty crappy earnings data and shorts all squeezed a run lower will be the most frustrating. first leg down will be viewed as just a pull back and the next leg will get people going what the fark was the market doing up there anyway but lack of pnl and fear of rips might hold them back from selling and finally if we continue lower you will have fast money frustrated and long money well they moan all the time anyway
so there you have it- I'm been trading short from here and a bit higher in spx and iwm - rode some up but looking for much lower levels.
generally after a small pull back after such a rip the fear is of missing next leg up as oppose to continued weakness

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Leftback
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May 5, 2016 at 11:09 AM ×

Firmer dollar [even as MM points out, if it rises for no apparent fundamental reason] will be the pain trade, and even with a modest rise to DX 96 everyone who recently jumped on the reflation train is going to feel it. EMs, commodities, commodity FX, energy, high yield, small caps, all of it.

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Anonymous
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May 5, 2016 at 11:10 AM ×

Knowing what "Everyone" thinks - thats the trick aint it ? Hard to debate anything if you differ on that view.

But I think the AUD move reflected the number of people on the reflation train. NFI as well but I do not think bears are the majority here.

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Anonymous
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May 5, 2016 at 11:40 AM ×

The ECB and BOJ are fighting back hard against the Fed's attempt to weaken the USD.

It's been clear for sometime that we are engaged in a currency war of giant proportions. In a world of declining growth and productivity, the only way to increase GDP is to "steal" that growth from another country via currency manipulation. The Fed's recent attempt to weaken the USD was just this, however the ECB and BOJ are now fighting back in force. Under Yellen the Fed are probably too weak to fight back, however if they do watch for bad NFP numbers, and the Fed to reverse its decision on rate hikes, followed by more QE and/or NIRP for the US.

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Anonymous
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May 5, 2016 at 11:45 AM ×

ECB’s Visco: Mkt Concerns About Italian Banks' Asset Quality Are ‘Somewhat Overstated’ - RTRS

So basically Italian banks are all insolvent. As the ECB themselves commented, "When the situation is really dire, you must lie". Watch for EU equities to puke over coming days and a banking crisis to re-ignite in Europe.

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Cityhunter
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May 5, 2016 at 11:50 AM ×

Agree with Anon 11:10am.

As MM pointed out, watch out USD strengthening with treasury going up.

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Polemic
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May 5, 2016 at 12:14 PM ×

re Skr comment on copper. considering everything else's price moves today and renewed deafening noise about impending doom over China metals inventory/ speculation/ leverage etc. I'm going to put in a sneaky spec buy as the sky looks darkest right now.

Not macro I know, but even if there i going to be global doom one day, there is fun to had until that time comes.

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abee crombie
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May 5, 2016 at 1:30 PM ×

Interesting exercise to think about where the pain trade is. I am not sure if it is to the long or short side in any market as if I use myself as a guide as I have very little conviction here, though I would think a sustained higher move in US Dollar / lower commodities probably catches ppl off guard without any noticeable deterioration in eco numbers.Looking purely at price action, perhaps a weaker yen in most contrary

Its funny how we are all playing the game trying to forecast the US Dollar/ Commodities/ Equities etc which then have an effect on the REAL economy. Isnt it supposed to be the other way around most of the time? If you take a step back and look at the global economy, from the figures we have up to april, the picture I see was one of very weak global growth in 2014 that drifted into early 2015. We had a rebound in February, likely due to another restocking episode in China which helped boost global PMI and expectations of further cyclical improvement off low levels. The stock market got whiff of this and took off. Now the higher frequency data shows that the Feb levels might have been it, China PMI stuck, Korean export orders back down, ISM stuck. We all know China's stimulus was only going to last a certain time, but 2 months seems a little short. The question now is, are things going to slowly get better or was that it. The complicating factor, from an economic perspective is that financial markets DO play a large role in business confidence. So if the S&P starts tanking again, so will ISM likely and thus usher in the same reflexive sell cycle that I was so worried about in Feb. I'm not ready to jump into that boat just yet. ISM is prone to one or two month pauses.

http://www.bloomberg.com/news/videos/2016-05-05/clsa-china-caixin-services-pmi-data-is-worrisome

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Anonymous
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May 5, 2016 at 1:31 PM ×

Best to shy away from politics, unless it directly pertains to economics. The following post does just that. It highlights how Trump would be a fantastic president for the US because he would institute sound economic policies that the current corrupt elites are loathe to do:

http://ibankcoin.com/flyblog/2016/05/05/trump-the-way-this-country-has-been-managed-is-criminal/

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Anonymous
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May 5, 2016 at 1:47 PM ×

Anon 1.31
" It highlights how Trump would be a fantastic president for the US because he would institute sound economic policies that the current corrupt elites are loathe to do:"

It never ceases to amaze me just how any people we have in this world who are willing to suspend disbelief and park their brain neutral. Trump bats with the money son and you better believe it. Indeed if you are stupid enough to think any politician is going to be your saviour in this life then good luck with that.

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Anonymous
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May 5, 2016 at 1:51 PM ×

It's not a true "War" vis a vis currencies if all sides are complicit. And I do mean all. Yellen wanted the dollar weaker and she got it. Now what? Looks like she wants it stronger. What the lady wants, the lady gets.

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Anonymous
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May 5, 2016 at 2:02 PM ×

We all know that this day is not too far off:

DB:"…the ECB and BoJ should move more strongly toward penalizing savings via negative retail deposit rates or perhaps wealth taxes."

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Booger
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May 5, 2016 at 2:10 PM ×

MM: Great call on USD.CAD, it has been leading the dollar index the last few years so important to watch. I am wary of this move though having much follow through because oil is not confirming.

Anon 1:31 & 1:47, Michael Pettis has a good article on the Jacksonian tradition on his blog, which was good reading I thought. I don't agree with his assumption that Trump will burn out due to his inconsistency, stupidy or penis joke gaffes though.

Abee: an under the radar phenomena that has not been mentioned much is the effect of corporate earnings on payrolls. Usually the lag is around 6 months. Since there has been 4 quarters of declining earnings, I am thinking that must start to show up in hiring at some stage soon.

NFP: considering where the dollar is, Fridays NFP could be very interesting. A number under 150k may potentially have a significant dollar effect. Laugh if you will, but my estimate is 100k. I'm not trading anything from this crazy idea, but if it does occur, I think it will cause a washout for dollar longs and a good entry into long dollar in the next week or 2.

Commodities: they do look overpriced but my guess is a further bounce after this consolidation to really get people excited about a bottom in oil, resources and gold before it rolling over and dying.

Spoos: looks to me like the top is in. I would guess some churn for a month or 2 before a bum-clenching, hold onto the toilet seat, thai gastro type decline, aka mudslide.

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Corey
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May 5, 2016 at 2:12 PM ×

How bad must things be in China for any kind of understanding to be reached? Understanding + stimulus = continued softness?! So they've done what everyone else has and open the monetary spigot. But it's impossible to know how long and to what degree since for whatever reason the PBOC isn't as benevolent as good ol' Fed in spelling it out for us, imagine that!

The next leg whether it be up or down is all China. Europe and the US are just a sideshow at this point with low but steady growth which increases/decreases depending on whomever has the exchange rt give the advantage. Brexit, Yen, a socialist in the white house, don't matter. It all comes down to how much steel they will produce in China and they are already drowning in the stuff. I wouldn't call that chaotic, rather insane. But hey, people gotta eat so whadda ya gonna do?

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washedup
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May 5, 2016 at 2:15 PM ×

The 'pain trade' concept is a very tough one to apply consistently, because no one really knows WTF they are talking about when they talk 'positioning'. In my experience it works best in situations where algos/CTAs have created a move based on momentum, which the so called 'fundamental' guys happily takes the other side of, and then fundamentals catch up with the momentum to create a big parabolic phase. I am honestly not sure equities, where 99.5% of the market is long only can ever be a great candidate either way. Commodities and currencies, on the other hand, are the poster child.

Could the pain trade be happening in commodities? Maybe - the term structure has flattened a bunch in WTI, to Pol/anons point, but that could just as easily be narrated as 'the backs, which represent the ability of producers to survive at lower prices, have refused to participate in the front rally, and seem to be telling a lower for longer story'.

Its been a long time since Ive seen this board this differentiated in views but with strong conviction. Maybe the biggest tell is that Nico is choosing to quietly watch from the sidelines!

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Corey
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May 5, 2016 at 2:21 PM ×

Agree completely w Abbie about the reflexivity from fin mkts onto the real economy. We've relentlessly pursued the idea of a wealth effect to no ends and now we have it in an extreme form where a little eq vol stings a lot more than it used to.

Pain trade, not sure seems a bit relative and only really relevant when the market has strong conviction one way or the other.

Yeah I imagine Nico is just floating on the waves somewhere smiling trying not to get too sunburnt. Must be nice

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Anonymous
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May 5, 2016 at 3:19 PM ×

I think Nico got stopped out of his last positions (unfortunately they were v large size). If I'd lost that much money I'd want a break from the "pain trade" too.

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Leftback
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May 5, 2016 at 3:26 PM ×

Dixie (or Bucky if you prefer) breaking to new highs for this move. Respect the price action - the dollar is headed UUP.

Oil likely still on a wild goose chase at the moment with Canadian fires the latest excuse to lure in unwary longs. A steep decline ahead once the dollars used for those leveraged bets become more expensive and start to be repaid. Gold is also weak and looks set for a return to $1250. Small caps continue to trade heavy.

Expectations for tomorrow's number are rather low. Trade accordingly - in FX, especially.

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washedup
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May 5, 2016 at 4:38 PM ×

@LB even if If tomorrow's number is low (I am expecting such) are we supposed to keep celebrating the bearish implications for the dollar? US jobs are really the only credible engine left for the global economy at this point, and this market could use a reminder on what a risk aversion led dollar rally looks like.

It may not be too soon to wonder what would happen if US jobs start to sputter, given the usual lags observed in the past from when leading indicators turned - I am beginning to think Yellen may be talking QE 4 at Jackson Hole this year, despite it being politically charged (didn't really stop Bernanke, and at some point CB's will give up the independence pretense anyway) - I also think in the next 12-18 months asset markets may need to go price themselves to force govt policymakers into fiscal stimulus and a massive infrastructure bill, which there already is good support for.

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Anonymous
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May 5, 2016 at 6:23 PM ×

I believe that the best pain trade is always to bet against the majority of retail speculators. Case in point: Shanghai steelrebar future.

The other pain trade idea: major drug companies. The demographic trend is here to stay for a long time, in all major economies, US, EU, Japan and China. This is more a long term trade for me. Look, the political pressure to reduce the gap of prices difference between the US and other countries is very great, but the major drug companies can raise prices in other countries as well as cut prices in the US. So I am waiting for the entry point for now. Hopefully the next wave will bring it here.

Now on another note: when will the dip buyers appear here? I do not think most of us here considered this to be January style crash. So the question is when you are going to get in to trade on the short-term rebound, or even get long at all?

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abee crombie
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May 5, 2016 at 6:39 PM ×

i'm buying EEM a few percent lower or tomorrow barring a nasty surprise. Maybe LB is right and buckey is going higher but for now I will take the other side

rumor is that Brazil PM roussef will step down soon

Major drug companies are really cheap based on earnings and growth. I agree drugs are way too expensive but have read many arguments including the stagnant share of drug spending vs overall HC in US and also the alternative costs. There is real innovation taking place in biotech, even if a lot of "market cap" is in the orphaned / rare drugs where FDA approval is easier. But i learned my lesson buying MLP's too early last year. I'm waiting for retail to flush out of biotech before I jump in, but it is not a ponzi market imo. Get your shopping list ready bc large cap pharma can buy all the juniors with just a few years of cashflow. the outsourced R&D model is here to stay. picking the winners beforehand is another story

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AB
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May 5, 2016 at 7:31 PM ×

Pain Trade: Oil keeps moving up (no higher than $60 in 12 months), other commodity prices do not, dollar up and bear flattener in rates driven by an increase in labor share of income (drop in profits).

That ought to screw just about everyone.

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Anonymous
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May 5, 2016 at 7:52 PM ×

@abee,

You are buying EEM? interesting. I am shorting PCY and look to add my short if NFP lottery disappoints tomorrow.

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Anonymous
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May 5, 2016 at 8:30 PM ×

Chinese t-shirt: We grew credit at 25% YoY and all we got was lousy PMI #s.

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abee crombie
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May 5, 2016 at 8:34 PM ×

@anon, thats what makes a market

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washedup
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May 5, 2016 at 8:35 PM ×

@abee - buy EM
@AB - buy crude (AKA EM)
@anon 7:52 - sell EM
@LB - sell EM

Let's call this exchange from 4 clearly thoughtful smart guys, exhibit A in my current belief that there is no 'consensus' out there - it happens - its a constant struggle to avoid coming up with a fictitious positioning precept to justify one's book.

When all else fails, there is stops and hedges - you all know a thing or two about those...

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Anonymous
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May 5, 2016 at 8:39 PM ×

Fed already talking down a rate hike... stupid f*cks.

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AB
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May 5, 2016 at 8:42 PM ×

My scenario would have you sell EM. Yes, oil is up, but so is the dollar and short term rates while other commodities decline.

But, your overall point is well taken.

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CV
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May 5, 2016 at 10:11 PM ×

EM was a great trade in Q1 ... it will probably take a breather in Q2 since Mobius has been on the tape to tell everyone to buy with both hands ;). Not much of an FX guy as you know, but even I can see the inflection point here. Bucky needs to put up or shut up ... my base case is that the 1.16 is a ceiling for EURUSD, but that probably means it will zoom higher. We will see ... one thing is for sure ... EZ exports in Q2 will likely continue to come down.

Meanwhile in equities, the earnings season has been rather cruel to Retail r'US LLP, so we're licking our wounds, and not doing much!

Happy bingo day tomorrow.

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hipper
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May 5, 2016 at 10:52 PM ×

Just wondering: even if US does get a Q2 bounce is it that unreasonable to assume that the growth rate before the next recession has now been permanently damaged from the previous "normalized" years? Manufacturing PMI is at or in the toilet in the US for the 8th month and China for the 16th month, US retail sales growth has been decaying since almost mid 2011 and SPX sales and operating profits are stalling. Is it unreasonable to expect the EU growth will soon follow? If that happens that might be very bad since it just took the baton from the US. Oh and derivatives are supposedly 10x 2008 at $550 trillion. Is this bad?

I still think this would be a very late phase of the cycle excluding the temporary anomalies caused by the unprecedented levels of stimulus, and in the current form asset purchases have lost their most of their shine. Considering that fading CB actions and assigning them a continuously shorter life span might be a good idea. As can be seen they can't make profits any better (well excluding flooding money to buybacks ofc), they only act through making alternative investments worse. Does everyone think they can continue to do so till eternity excluding the scenario where they go really berserk with free of charge helicopter money for the masses (which will be a whole different ballgame)?

It's easy to (again) give sympathy to the latest Druckenmiller interview even if it sounds apocalyptic. There's no way out for the monetary mess and especially if things continue to decelerate. Maybe Fed manages to get another hike in before things in the grand scheme start blowing up. I've been building more cash but mainly because someone is paying 1 3/4% on savings which seems a decent risk free level compared to SPX ~2% divvy.

Re DXY if EZ gets into trouble just lagging US as I expect then yes it's going to be great for risk aversion. Maybe NFP will still offer a better entry point.

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