So Long 2009! It was…”Interesting” to Say the Least…

Stumbling Out of the Blocks (January to March)

If you thought 2008 sucked, the beginning of 2009 was worse. Plagued by poor data resulting from the global financial crisis, major economies were jammed in first gear and stuck in the mud. In Europe, countries were getting hit by massive declines in demand since nobody wanted to spend, but then again, it’s not like they had any money to spend in the first place!

Meanwhile, the US unemployment crawled towards 7.0% as more and more companies were forced to cut payrolls. The Fed had predicted that the US economy would shrink by 5% during the first quarter of 2009. It actually did worse, declining by 5.5%. Stocks and equities were falling everywhere, causing investors to flee to the safety of US bonds. Naturally, this led to a strong dollar rally.

What most people didn’t realize is that central banks have a few tricks up their sleeves, with the ability to do some ‘magic’ by printing money out of thin air… which is exactly what they started to do! The aftermath of the recession led to massive fiscal and monetary efforts to help bankers and consumers do what they do best – lend and spend! The wheeling and dealing of central bankers and government officials led to record low interest rates and unprecedented quantitative easing measures. Even the traditionally stubborn ECB loosened up and cut their base rate! At the same time, US President Barack Obama and other government officials pushed for more economic stimulus.

By the time March rolled around, signs of economic recovery were starting to pop up here and there. Still, people were still skeptical whether or not we really avoided the financial abyss and that the rallies in the markets were just mirages in the recessionary dessert.

Risk Appetite Starts to Grumble (April to June)

Relatively sour US and Japan fundamentals, in addition to somewhat improving economic data from the other economies, describes the economic situation for the 2009’s second chapter. “The pace of deterioration has slowed,” said main stream media while Australia posted positive economic growth for the second quarter, effectively dodging a recession.

I could almost hear Kanye West say “Imma let you finish Forex Gump but I gotta say that Australia did emerge as a top contender for the best performing economy of all time… OF ALL TIME! Okay fine… maybe just for 2009…”

In actuality, economies were far from what I’d call “healthy.” For one, the US economy continued to falter, posting a 1.0% decline in GDP. Job losses ravaged the great nation, growing from 500K to 600K, as companies shouted “Beat It!” This left the unemployment rate to shoot up to 9.5%. The same tune was heard across the globe as the same held true for the UK, euro zone, and Japan.

Given these downbeat fundamentals, governments across the globe scurried to dish out further stimulus programs and rate cuts in an effort to encourage lending and spending. Central banks like the ECB, BOC, RBNZ, and RBA continued to slash their rates to all-time lows while the Fed, BOJ, and BOE did some hocus pocus and created more money out of thin air.

On top of these monetary easing measures, the US and Japanese governments rushed in additional spending as well. A subdued economic environment and outlook combined with the US’s massive debt obligations also led to a series of questions by the BRIC nations regarding the dollar’s stability, placing downward pressure on the world’s reserve currency.

At the time, it was understandable why a lot of investors and traders were still afraid to go in and invest during the interval’s outset. However, traders didn’t realize that it was the start of a turn-around across the markets. After hitting yearly lows, non-dollar currencies screamed “This is it!” and bounced back from their downtrends. At the same time, equities and stocks started to rally as well. Soon after, it was risk appetite calling ‘shotgun,’ driving currencies and equities markets away from their recession lows.

Statistical Recovery? (July to October)

Indeed, the world suffered a lot of heartaches as this period was characterized by losses… Jobs, profits, Farrah Fawcett, and the King of Pop. The succeeding months, however, served as a bright ray of hope during those dark times. It was during this period that several economies gracefully exited the recession, powered by both aggressive and not-so-aggressive stimulus policies from their respective central banks. Slowly, these moves were starting to pay dividends as countries exited the recession one by one.

Two of euro zone’s largest economies, Germany and France, were able to post positive economic growth for the second quarter, although it wasn’t enough to carry the entire euro zone out of the recession until the third quarter. Strong GDP growth from its main trading partners, Japan and US (which were able to climb out of the recession pool in the second and third quarter respectively), were key in pumping up economic activity for the region.

Moreover, it appeared that the US enjoyed an unprecedented 3.5% economic expansion for the third quarter (the final read for Q3 is 2.2% growth), resulting mostly from the massive stimulus packages doled out by the US government on top of the Fed’s already huge easing measures. President Obama’s Cash for Clunkers program, tax cuts, and housing rebates seemed to have done the trick in spurring consumer spending and home sales, consequently saving the US economy from another quarterly contraction.

The Dollar is King Again (November-December)

Just when recovery seemed to be set in stone and everything was going to be smooth sailing from then on, currency traders found themselves confused when the relatively super stellar NFP report released during the first of December triggered widespread dollar buying. Surprise, surprise… the report caused a break in the inverse correlation between the equity markets and the dollar’s value.

Although the NFP report was the catalyst the dollar needed to stage its magnificent December rally, it would be silly to assume that it was that event alone that gave the rally some legs. Days after the NFP report, Dubai’s government asked for an extension in their debt repayments, causing credit agencies to downgrade the credit ratings of some companies in Dubai. Greece soon followed suit, as Fitch, a credit rating agency, cut the nation’s credit rating to BBB+. Meanwhile, Spain’s debt grade outlook was lowered to “negative” by S&P as its budget deficit was estimated to reach 66% its GDP in 2010. All these debt worries scared the bejeebus out of traders and investors, causing them to run fast from the Euro and back to the safety of the dollar.

Dollar buying intensified further when strong economic data from the US kept coming out and when the Fed adopted a slightly more hawkish tone in their monetary policy stance, hinting that they could raise interest rates earlier than expected. Couple this with the end-of-year profit taking of dollar shorts of long-term currency investors and we’ve got a nice, solid dollar rally. At least for the fourth quarter, the green is back for the dollar!

The year is not quite over yet, but it looks like 2009 is pretty much wrapped up for most traders. It’s time to look towards 2010 and what do ya know…I just so happen to be working on that! Stay tuned this week for my outlook on what may influence currency traders in 2010!