The Break Up
Risk and currencies have split. I say good riddance! The employment numbers in today’s non-farm payrolls report did 2 things today:
Solidified the evidence that the US economy is beginning to show concrete signs of stabilizing; and
Significantly shifted the fundamental landscape of the currency markets
Both these points gave forex markets the warm fuzzies for the USD as The United States seems to know how to navigate these crisis waters.
The Proof Finally Showed Up In The Pudding
The second half of this year has seen strong corporate earnings in US companies and banks, slowing declines in consumer spending, and increasing activity in manufacturing and construction. US companies are proving that their cost management tatics are working as fewer workers are loosing their jobs. Consequently, people feel more confident and as they save and spend more. Government spending has helped the manufacturing and construction sectors. The Fed has been cautiously bullish. Because labor markets are a lagging indicator, today’s report signals that the US economy has been on the road to recovery since the start of the second quarter of this year.
The UK economy has shown similar signs of stability but the BoE was surprisingly bearish in their decision announcement yesterday. By extending their QE program even more than expected, the BoE signaled the UK economy is not doing very well still. In addition to some still poor UK corporate earnings report, market sentiment is making fundamentally stark contrasts between the US and UK economies.
Fundamentals — “I’m Baaack”
Since the start of this economic crisis, risk appetite has determined currency flows. When bad economic reports and news caused equity markets to move down, the USD actually gained as folks sold risky assets for dollars. When good news hit, people felt more comfortable investing in riskier assets and, therefore, sold dollars to buy those assets. Currency traders could trade accordingly based on which direction equities moved depending on the currency. Today’s NFP report, moved BOTH the dollar and US stock markets to rally. The markets are moving based on fundamentals again. Good US economic data now fuels dollar strength.
Time Will Tell
The US dollar strengthened at the same time that Wall Street rallied for the first time in roughly 2 years. Very interesting development.
Now I muse by asking: Is this a new shift in market sentiment or is this a one-off event?
