By now, I’m sure you have all heard that the NFP report came out better than expected, printing job losses of 247,000, bringing the unemployment rate to down to 9.4% from 9.5%. Actually, it seems fishy – a quarter million jobs were lost and yet the unemployment rate went down? Looking at the headline number, it just doesn’t add up. In any case, now that the NFP storm has passed, it’s time to take out the covers, unbolt the windows and take a look at the aftermath.
Since the collapse of the financial system, the USD has traded inversely versus equities. This means that when stocks and other higher yielding assets rise, the dollar’s value falls against other currencies like the EUR and the GBP. This kind of perception on the market has been widely accepted as true but the dollar’s price action after the release of the NFP report last Friday begged to differ! The dollar won out, rallying against the EUR, GBP, CHF and JPY, despite the improvement in the US job market.
Has the inverse correlation between the US capitals markets and USD strength finally been broken? Or are risk-driven investors just starting to get picky? The AUD and NZD, however, remained steadfast in their fight against the USD. Could investors be looking for those delicious interest rates? Was the AUD and NZD’s significant yield advantage (3% and 2.5% respectively) over their Western counterparts be the basis of their rise? Are carry trades back?! Oh boy – things are really heating up!
The upcoming FOMC interest rate decision could provide the more evidence for us to whether the inverse correlation between equities and the value of the USD is truly broken or not. The Fed is expected to keep rates steady at 0.25%. In their last statement, the Fed expressed their intention to continue to support the US financial market through quantitative easing. We’ve been hearing this statement over and over again, and market players are already at the edge of their seats awaiting more conclusive actions from the Fed. With recent economic data providing some optimism, the odds are stacked against further easing policies.