Risk Appetite Fandango

Is the labor market actually improving? Is unemployment starting to plateau? Well, if you follow the NFP report, it sure looks that way! While the report showed that US firms cut an additional 36,000 last month, this figure was better than the 56,000 job losses expected. Furthermore, this kept the unemployment rate dancing steady at 9.7%.

Traders and investors took the news positively, as they threw their hands in the air, waving them like they just didn’t care, buying every higher yielding asset in sight! After another poor start to the week, the euro and pound, the two currencies which have fallen the most against the dollar in recent weeks, were both bought up, with the two eventually erasing most of their losses. Meanwhile, the yen took another beating, as it too had several missteps across the board.

After dominating the majority of 2010, is risk aversion on the way out?

Remember that, all throughout February, sentiment had been down because of the debts fears that were plaguing much of the European countries. Concerns regarding the UK’s and Greece’s mounting deficits had placed great pressure on their respective currencies. The euro duplicated its losses in January, sliding by around five hundred pips against the yen and the dollar in February. The pound’s decline, on the other hand, was much more pronounced, dropping by about a thousand pips versus the two safe haven currencies during the same period alone!

The market’s attitude, however, started off differently this March. After the bloodbath to start the year, majority of the anti-dollars suddenly rallied during the beginning of March. The question now is… Are we just seeing a correction or is sentiment really starting to shift?

After trampling the markets early this year, those dollar and yen bulls are bound to take their profits sooner or later, causing some major short term correction! On the fundamental side, several economic reports around the globe, even in Europe, are starting to swing positively as well.

In order for risk appetite and the bias in selling the greenback to continue, I think we need two things:

  1. Concrete action from the euro zone to calm concerns on Greece’s debt problems. Although the Greek government has come with a plan to cut its budget deficit, it still is just a plan. And like all plans, it’s vulnerable to not pushing through. Unless some concrete action is done by Greece, the euro’s recent gains versus the yen and the greenback will remain capped.
  2. Strong retail sales data from the US… but not too strong! It has to come out better-than-expected, but not too good to give rise to the speculation of rate hike. Remember that unexpectedly strong NFP report last October? If the rate hike prospects from the US starts popping out again, we could see investors start unwinding some of their carry trade positions and cause another dollar rally much like what we saw late last year.

These are just guesses though, and at the end of the day, it’s all about what price action is telling us! It’s just way too early to dance the Macarena and say that the recent rebound among the anti-dollars is already an indication of a sentiment shift!