FOREX TRADING

U.S. Economic Turning Point? Maybe, But Not Yet

The NFP report created a strong wave of long dollar orders into the currency market, as the labor market showed the first signs of improvement in two and a half years, since the unemployment rate bottomed in the 4.5% region in mid-2007.

The November NFP report showed that the U.S. economy shed only 11K jobs, the least in almost a year, while the unemployment rate fell 0.2%, down to 10.00%. However, it should be noted that the infamous Birth/Death model added 80K in November and approximately 1200K (1.2M) jobs over the last three months. The birth/death model is used by the BLS to reduce sampling errors, but over the time, it has produced more question marks than actual answers.

The Canadian economy also posted very strong numbers for the month of November, as it added nearly 80K news jobs. Since 2000 there have been only 4 occasions that the Canadian economy added more jobs than it did in November 2009, which denotes a strong bounce in the Canadian labor market.

For a very long period, the financial market had been pricing into fair value on risk a very weak labor market, as something that will act as a major drag on the U.S. economy. However, with the U.S. labor market (and with the Canadian market) turning around at such a strong pace, the U.S. economy seems to be heading towards a strong recovery phase, something that the market do not seem to have taken into account as yet.

In the equity and Treasury markets, the trend is clear; long shares, short Treasuries. This happens as the economy recovers, and aggregate demand (spending) picks up again, allowing the Federal Reserve to contemplate raising the key interest rate, thus lowering the price of Treasuries.

In particular, the Treasury market saw some very strong moves following the NFP report. The yield on the 5-year Treasury notes added 13.7 basis points, while the same maturity TIPS, (which protect investors from inflation) adding 9.5 basis points.

Since March 2009, the dollar index had been moving constantly lower due to the interest rate differential between the Fed and major central banks. However, if the labor data continues to improve, and the employment numbers feed into PMI, Inventory, and GDP growth, the Fed may be able to start rising rates much faster than expected.

Higher interest rates is something that could reverse the selling of the dollar, while at the same time allowing the S&P to also move up, in a move that reverses 18 months of correlated credit crisis trading of S&P/Usd; as one goes up as the other has been going down.

In the short term, the dollar index will need to re-adjust its value to the new fundamental data, but in the long run investors still need to see if this labor-market recovery has real legs. As a note, even ahead of this report, some headlines were pointing to the fact that the U.S. economy will recover faster than the euro-area, something that should further help the greenback over time if these employment numbers are not eventually revised lower.

Is this an economic turning point? It might be, but traders will need to see the global market buy into it with a long close above 1118 on S&P future. Oil getting above (and holding $79) will be a reflection of global demand, and gold holding under $1200 is a play that signals fair value has been found in an asset class that has been a safety blanket, while the market weighs employment noise.

Written by TheLFB Trade Team, © 2007-2008 LFB Services, LLC. All rights reserved. http://www.TheLFB-Forex.com

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