Front-Running Currencies


The long-awaited U.S. non-farm payrolls data released on Friday was disappointing. While November jobs were revised to a 4,000 gain, December saw an estimated loss of 85,00 jobs (keeping in mind that there is a wide margin of error for this number). In sum, as most economists stated after the release, it appears “we’re not out of the woods yet” (WSJ).

U.S. Dollar

This was a pivotal point for the U.S. dollar. Until December 2009, one of the factors contributing to the dollar losses was the sentiment that the U.S. economic recovery was going to under-perform the rest of the world and that the U.S. interest rates were going to stay low for an extended period of time. Then in December the dollar bounced back and also became positively correlated with equities as the idea emerged that the U.S. economy was going to outperform and investors anticipated quicker-than-anticipated rate hikes.

However, expectations of higher interest rates were based on the premise of an improving U.S. jobs market. In general, it’s hard to expect the Federal Reserve to increase rates while a “jobless recovery” is still in place and inflationary pressures are low. As a result, this puts us with an overall negative weekly bias for the dollar.

Additionally, the previous negative correlation between the dollar and equities markets (the “risk-appetite” trade) is likely to continue. This could be changed (while unlikely) depending on the earnings results on Monday and Friday from the major U.S. companies Alcoa and JP Morgan Chase, respectively.

Japanese Yen

Last week the new Japanese Finance Minister Naoto Kan started his first day on the job by calling for a weaker Yen. Specifically, he stated the desire for a U.S. dollar-Yen rate of 95. Not long after, Prime Minister Yukio Hatoyama

“sought to restrain his new appointee, telling reporters Friday morning: ‘When it comes to foreign exchange, stability is desirable and rapid moves are undesirable. The government basically shouldn’t comment on foreign exchange.’”

Source: WSJ

All of this rambling only served to add confusion in the markets. Nevertheless, I believe these comments put a slight negative bias on the Yen because we know that the Japanese central bank wants to see a lower yen. Even if it does not intervene in currency markets directly, the central bank and the government could use other methods to influence the currency.

Emerging Markets Currencies

Besides the U.S. dollar and Japanese Yen negative biases, we also have to notice that investors are fleeing into emerging markets by the boat loads. Even though this is a longer-term trend, we have to keep it in mind when putting the puzzle together. According to EPFR Global, emerging markets mutual funds raised $80 billion in 2009, shattering the previous annual record of $25 billion (NYT). And it keeps going up. It appears BRIC (Brazil, Russia, India, China) is still in fashion.


Lastly, the new buzz on the financial news arena is the 16-month low Volatility Index (VIX). The index reached pre-Lehman levels which is raising concerns among some investors. Some people are arguing that this may be another “calm before the storm”. Therefore, keep your trading eyes open for any news that may change the course of the Vix.

* Bad jobs data puts a negative bias on the dollar.

*New Japanese finance minister adds a slight negative bias to the Japanese Yen

*Higher-yielding currencies still remain on their bullish long-term trend.

*Pre-Lehman levels on the VIX adds concern of a pullback.