Is there logic to Fridayâ€™s move in the Dollar? Despite
atrocious job numbers and indications of a deepening American recession the
Dollar gained against all of its competitors except the Japanese Yen.
The United States unemployment rate jumped 0.4% to 7.2% in
December. In February of last year the rate was 4.8%. In eleven months the
percentage of the work force seeking but unable to find work has increased by
50%. American job rolls shed 524,000 paychecks in December with an
additional 154,000 jobs lost in October and November according to the revised
statistics. Employment in all categories except health care and
government declined. Bad as the December numbers were they will probably worsen
in the next three months as revisions and late reporting add to the
total. The US economy shed 2.6 million jobs in 2008. This was the worst
one year total since 1945, when 2.75 million jobs were eliminated as war
production ended with victory in World War Two.
Yet in the face of these miserable statistics, or maybe
because of them, the Dollar scored. The Euro lost 2.2% against the US currency,
the British Pound 1.3%, the New Zealand Dollar 1.0%, the Australian Dollar
1.3%. On the principle trading side the Dollar gained 2.25% against the Swiss
Franc and 0.7% against the Canadian Dollar. Only the Yen moved higher
against the US currency appreciating 1.5%.
There are three rationales operating behind this Dollar
move, each offers a different explanation for the currency effects of the world
economic situation. We can call them the trade positioning and Yen cross
crowd; the safe haven players; and the US recovery first nationalists.
For very different reasons each of these explanations boosts the Dollar when US
economic news is poor. Perhaps it is surprising that negative economic
news puts all three explanations in the strong Dollar camp but the logic is not
The trading factor is simpleâ€”it is the yen crosses.
Even if it makes no comparative economic sense for the Yen to have strengthened
four figures against the Euro because of poor US job figures the reaction of
the cross traders is by now an ingrained feature of the currency markets. â€˜Risk
aversionâ€™ is the current shorthand for this reliable short term trade. If
economic calm is ascendant or the news is moderate buy the crosses, if the
reverse occurs, sell the crosses. Is this an image of the relative economic
strengths of the Eurozone and Japan or a reflection of central bank rate
policy? No. This is a straight forward reactive trade that has worked for
years. This â€˜risk aversionâ€™ selling in the yen crosses is the standard trading
response to worrisome economic news. Though it is not a specifically
pro-Dollar trade the over Dollar component of shorting the Yen crosses supports
the Dollar against the Euro. Selling the Euro/Yen weakens the Euro
against the Dollar and the British Pound as well as the Yen. That
weakness is reflected in the Euro US Dollar rate as well as the Euro/Yen rate.
On Friday the movement in the Euro after the Non Farm
Payrolls release mimicked the Yen crosses. The top in the crosses and the
Euro came at the same time, just after the NFP release. The percentage of the
peak to trough drops in the crosses and the Euro was similar: Euro/Usd 2.45%;
Euro/Yen 3.17%; Stg/Yen 2.77%; Aud/Yen 2.97%; Nzd/Yen 2.60%. These Yen crosses
depreciated an average of 2.88%. The Euro fell 2.45%. The Euro/Usd
declined 85% of the average drop in the Yen crosses. In contrast the
Usd/Yen fell only 1.66% or 58% of the average in the Yen crosses.
A much greater percentage of the drop in the Yen crosses was
absorbed by the Euro against the Dollar than was absorbed by the Dollar against
the Yen. The Dollar gained 2.45% versus the Euro today but only lost
1.66% versus the Yen. One could say this puts a figure, at least for Friday, on
the value of the second and third rationales for Dollar strength in the face of
bad news. It is a measure of the combined safe haven and recovery first
aspects of the competition between the US Dollar and the united European
Another way to think about the impact of Yen cross trading
on the Dollar is to imagine a Dollar move that stemmed from a factor which had
minimal impact elsewhere -- say an unexpected Fed rate hike. Under those
circumstances you would probably see a fall in the Euro against the Dollar
and a rise in the Dollar against the Yen while there might be little movement
in the Euro/Yen.
The key fact in assessing the unequal effect of increased
United States economic risk on the Dollar is that US Economic risk is really
world economic risk and as such it affects all currencies.
The second rationale is commonly called the safe haven or
the flight to safety trade. The haven sought is comparative. There
has been no country and certainly no industrial country that has not been
touched by the recession and the financial crisis. If the US economy is
headed for a deep recession the rest of the world will not escape. If the world
financial system is suffering a prolonged credit drought the US has the
greatest resources to overcome it. In this view it is the US, with the largest
and most productive economy, the worldâ€™s reserve currency and the most stable
political system, that has the best chance of avoiding disaster.
The last rationale is more optimistic. The American
Government recognized the severity of the financial crisis before any
other. It has done more and is planning to do more than any other
advanced economy. The economy is the first task for the new Obama
administration. The Federal Reserve has been more active in gauging and
surmounting the financial turmoil than any other central bank. Recessions, even
depressions do not last forever. When the world economy finally turns around it
will be led by the United States. Eventually US economic numbers will turn
positive. Will Eurozone numbers then still be mired in decline? And if they are
will the Dollar commence a powerful rally? This rationale is a vote for the
financial flexibility and economic potential of the United
It is peculiar that unrelievedly bad American economic
reports serve to support Dollar. But the logic does not focus solely on
the US but on the US role in the world economy. If the world economic
system is headed for years of turmoil then the US is best positioned to weather
the disaster. If the world is plunging into a deep recession then the US
is best equipped to emerge first. These are not facts; they are
perceptions. They may turn out to be true or they may not. But for
the time being they are the rationales behind trading decisions. In the
comparison between the US and its trading partners the Dollar still looks like
the best bet to currency traders.
IMPORTANT NOTICE: These
comments are for information purposes only. Past results are not necessarily
indicative of future results. FX Solutions, LLCï¿½
believes that customers should be aware of the risks associated with
over-the-counter, spot Forex. Forex trading is highly speculative in nature
which can mean currency prices may become extremely volatile. Forex trading is
highly leveraged, since low margin deposits normally are required, an extremely
high degree of leverage is obtainable in foreign exchange trading. A relatively
small market movement will have a proportionately larger impact on the funds
you have deposited. You may sustain a total loss of your funds. Since the
possibility of losing your entire cash balance does exist, speculation in the
Forex market should only be conducted with risk capital you can afford to lose
which will not dramatically impact your lifestyle.
To the best of our ability,
FX Solutions believes the information contained herein is accurate and true. We
reserve the right to make corrections and/or update the material when deemed
necessary. Therefore, FX Solutions assumes no responsibility for errors,
inaccuracies or omissions in these materials.
Distributed by: FX Solutions, LLC., Saddle River Executive Centre, One Route 17
South, Suite 260, Saddle River, NJ 07458
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