Tuesday August 11, 2009 - 01:54:59 GMT
Share This Story
Foreign Exchange Analytics - www.fxa.com
Forex Blog - Markets Ready for Theme Change?
Markets Ready for Theme Change?
Friday saw the US dollar rally on less worse-than-expected non-farm payrolls shoot higher against most currencies all the while US stocks traded up and Treasuries traded down. It looked very much like a thematic change for the FX market at the very least where in the last 18 months the USD has reacted poorly to better-than-expected US economic news and data while riskier assets and currencies have rallied on â€śgoodâ€ť US fundamentals. Conversely signs of stress in the economy and capital markets have driven the dollar higher as markets treated the US dollar (and Japanese yen) as safe-haven currencies (deleveraging shorts).
Friday was dĂ©jĂ vu â€“ the dollar rallied on positive news on the labor market (less negative payrolls decline and positive drop in the unemployment rate). It was as if the 18 months of risk aversion incentives for pricing the USD were out the window and the world had gone back to a simpler time when things like relative growth rates, places in the business cycle, official interest rate policy and expected rates of return mattered more than the latest reading on risk aversion.
At some point in the not too distant future markets will have to give up risk aversion and go back to more normal inputs for setting exchange rates. After all it has been a bipolar world with the US and global economy walking a knifeâ€™s edge between a future with capitalism and a future without â€“ boom or bust. Grey area was nowhere to be found. And so it should have been with the stakes never higher and the policy response a near complete unknown (unknowable) â€“ scale, speed, implementation, cost, credibility and independence all on the line 24-7.
Now we can at the very least agree that the capital markets are functioning (some areas better than others and all with the aid of central banks and governments), investors are exiting risk free cash and bills and the real economy is showing definite signs of life (after near $12trln in government stimulus according to some estimates including c bank liquidity injections).
The backdrop is no longer feast or famineâ€¦we have crossed the knifeâ€™s edge (think Maineâ€™s Mount Khatadin) and the landscape looks far more stable and far less dangerous.
I am not arguing an end to the rally in â€śriskâ€ť currencies ahead â€“ the backdrop favors higher risk assets and FX as in a global recovery (for the time beingâ€¦into Q1 2010 at least). But in a normal world investors and speculators differentiate among assets and FX and we may be seeing this emerge with the change in themes. Why else would the MXN, CLP, BRL, KRW, IDR to mention a few be doing well against the USD as the USD runs up versus the EUR, GBP and CHF. And not all developed market currencies are the same â€“ AUD case in point.
The days of buying anything depressed (even AIG stock) may be nearing an end as market psychology normalizes along with the real economy and banking system.
I may be early on the theme change â€“ todayâ€™s market has elements of bipolar approach of the last 18 months. And one dayâ€™s price action and narrative does not make an inflexion point necessarily. I want to see more data and more narrative, but change is a coming.
Forex Trading News
Daily Forex Market News
Forex news reports can be found on the forex research
headlines page below. Here you will find real-time forex market news reports
provided by respected contributors of currency trading information. Daily forex
market news, weekly forex research and monthly forex news features can be found
Real-time forex market news reports and features providing
other currency trading information can be accessed by clicking on any of the
headlines below. At the top of the forex blog page you will find the latest
forex trading information. Scroll down the page if you are looking for less
recent currency trading information. Scroll to the bottom of fx blog headlines
and click on the link for past reports on forex. Currency world news reports
from previous years can be found on the left sidebar under "FX Archives."