FX: Skepticism Seeps through the Markets

Posted on

Most of the major currencies are trading lower or unchanged against the U.S. dollar this morning as risk aversion seeps through the foreign exchange market. Equities performed extremely well on the first trading day of the year but the lack of participation from the EUR/USD was a sign that currency traders were not convinced that the Fiscal Cliff deal was enough to remove the risks in the financial markets. Today the selling has extended with the EUR/USD breaking below 1.30. Considering that negotiations still need to happen around the debt ceiling and spending cuts, their skepticism is probably warranted. Nonetheless, given the breakdown in the correlation between the EUR/USD and stocks, either stocks are due for a correction or the sell-off in the EUR/USD is overdone and unfortunately we believe it’s the former and not the latter that will need to correct.

In the meantime the focus this morning is shifting to Friday’s non-farm payrolls report and so far it is looking like NFPs will be strong. According to private payroll provider ADP, U.S. companies added 215K jobs last month. The market had only been looking for a 140K rise so the outcome was much stronger than anticipated. While the absolute level of ADP hasn’t always correlated with NFPs, it is generally a reliable directional indicator for payrolls, which means that the pace of job growth should have increased in the month of December. Jobless claims on the other hand rose to 372K from an upwardly revised 362K. Claims tend to be fairly volatile around the holidays so we are not surprised by the increase. Overall, claims are lower in December than in November, which is still consistent with an increase in non-farm payrolls tomorrow.

Kathy Lien
Managing Director

2 thoughts on “FX: Skepticism Seeps through the Markets”

  1. I think there is a new definition of safe haven currencies, namely any currency that has an economy that can, or is perceived to be able to, generate growth will be the new safe haven currency. This explains why Cable and EURUSD both fell while NZD, AUD, CAD all held up relatively well. If reduced QE prospects was the main driver then commodity currencies should have fared the worst. USD is also a growth currency and explains why the negative correlation with the S&P appears to have broken down over the last couple of days. Reduced QE prospects today re-established this negative correlation today. But this is temporary in my view and if we get a strong NFP (by no means certain) we should see this negative correlation breakdown again and replaced by a positive correlation between equities and USD. A negative NFP and we should see a negative correlation between NFP and S&P re-establish. Either way this suggests very limited downside risks to S&P tomorrow as we trade the NFP.. So GO LONG S&P!

  2. The currencies can yeild higher interest are the “Risk currencies ” Not “Safe Heaven”. The safe heaven currencies are the currencies that are trading at large volume and can be borrowed to fund other currencies.

Leave a Reply to Andrew Cancel reply

Your email address will not be published. Required fields are marked *