FOREX TRADING

Negative Correlation Between USD and Stocks Over?

The dollar surged on Friday following good news from the US labor market. US nonfarm payrolls fell only 11K in November, much better than expectations. Treasury bonds, gold and commodity prices fell. US stocks and greenback initially rose in tandem, but falling commodity prices and rising interest rates pressured equities. The S&P 500 closed well off its high, up 6.06 to 1,105.98. The yen plunged.

The strong US employment report and rising US interest rate may return the yen as the primary funding currency in carry trades. The euro declined and broke its long-turn uptrend but closed about the 1.48 support. Sterling fell but its fall was limited by speculation the UK government will announce a plan to reduce its budget deficit. The Swiss franc depreciated and broke its uptrend. The Canadian dollar was little changed as Canada’s employment rose. The Australian dollar fell to important support from the long-term uptrend.

The dollar index surged and US stocks gained modestly. The dollar index has been inversely correlated with the US stock market. We may be witnessing the breakdown of this correlation. Still, it is too early to call for an end. The dollar index has broken its short-term downtrend; however, having not formed a bottom yet. The S&P 500 index is below important resistance in the 1120 area. A sharp increase in dollar demand could lead to a sharp USD appreciation, which in turn could overvalue dollar denominated assets and lead to an equity selloff. That would mean the negative relationship would prevail, just that the direction of the dollar and equities would reverse.

Financial and Economic News and Comments

US & Canada

US employment conditions improved impressively in November. Nonfarm payrolls declined 11,000 for the month, much less than market expectations, after revised drops of 111,000 in October and 139,000 in September that were much smaller than previously reported, figures from the Labor Department showed. The revisions to those two months added 159,000 to payrolls, bringing the net gain in today’s employment report to 148,000. The strongest payroll increases were for employment services (+61,000), and education/health (+40,000), while the largest payroll losses were in manufacturing (-41,000) and construction (-27,000). The unemployment rate unexpectedly declined to 10.0% in November from 10.2% in October. Average hourly earnings increased a slightly more-than-expected 0.1% m/m to $18.74 in November and rose 2.2% y/y. Average weekly hours increased to 33.2 from October’s 33.0.

US factory orders rose a more-than-expected 0.6% m/m in October, the sixth gain in seven months, to a seasonally adjusted $360.521 billion, after an upwardly revised 1.6% m/m advance in September, data from the Commerce Department showed, indicating the US manufacturing sector is steadily recovering. Excluding transportation, factory orders increased 0.5% m/m to a seasonally adjusted 319.159 billion, following September’s upwardly revised 1.5% m/m gain. October factory orders fell 10.6% y/y nsa and fell 9.9% y/y nsa excluding transportation.

Canada’s employment rose a much more-than-anticipated 79,100 in November to 16,873,900, just 1.9% below October 2008’s peak, after declining 43,200 in October, according to figures from Statistics Canada. The unemployment rate unexpectedly declined to 8.5% from October’s 8.6%. Full-time employment rose for a third consecutive month in November, rising 38,600, while part-time positions climbed 40,400 following two months of losses.

Canada’s Ivey PMI declined more than expected to 55.9 in November from 61.2 in October, indicating purchases in Canada’s public and private sectors increased last month but at a slower pace, according to data from the Richard Ivey School of Business and the Purchasing Management Association of Canada. A figure above 50 means the number of firms saying business improved was greater than the number saying it deteriorated. The November indexes for employment, inventories, supplier deliveries, and prices stood at 42.6, 41.1, 46.9, and 53.0, respectively.

Europe

Switzerland’s consumer prices increased a slightly more-than-expected 0.2% m/m in November after a 0.6% m/m advance in October, according to CPI data from the Swiss Federal Statistical Office. November CPI was unchanged y/y, following October’s 0.8% y/y decline.

Asia-Pacific

Japan’s Prime Minister Yukio Hatoyama’s plan to announce his stimulus package of as much as ¥4 trillion ($45.4 billion) was blocked by Financial Services Minister Shizuka Kamei, head of one of the two coalition parties. The stimulus package will likely be released on December 7, Chief Cabinet Secretary Hirofumi Hirano said.

FX Strategy Update

Hans Nilsson
Capital Market Services, L.L.C.
www.cmsfx.com

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