*** Currency Market Analysis 10-04-2012 ***

[The Machine]

Markets dive-bombed yesterday as the fallout from Friday’s Non-Farm Payrolls continued. All major North American markets posted losses in excess of 1%. This figure remained even after markets were able to muster a rally going into the afternoon close. European markets opened up for the first time since Friday’s big news, and their reaction was as expected: red numbers across the board.

The Dollar Index is marginally stronger this morning, as there is still a significant amount of concern present within the market. The Canadian unit is being pulled back to parity but is still sitting well within its 0.9845/1.0050 range, which has dominated trading for the last 11 weeks. North American equity futures are flat this morning, while oil is slightly lower.

There are no major data releases scheduled for today, but tomorrow we will see crude oil inventories, the Fed’s Beige Book, and an Aussie unemployment rate.

All Things Asia

China hit markets unexpectedly when they announced a trade surplus for the month of March. The surplus of 5.35 billion compared to last month’s deficit of 31.5 billion is a massive swing. Breaking down the numbers, we see export growth rising 6.8% month over month, while import growth posted a disappointing 5.3% month-over-month gain. This seems to be a one-month anomaly in the data, and one reading certainly does not mark the start of a trend. If you look at the previous readings, the trend is still pointing to a continued slowdown of economic activity. The optimist will see this as a positive, as it means Beijing will be forced to open up the piggy bank again, with more accommodative monetary policies. The pessimist will argue that this is just another sign pointing towards a continued slowdown in the global economy.

Across the Yamato Basin, the Bank of Japan held rates steady overnight and refrained from adding any further stimulus to their asset-purchase program. Currently Japan is halfway through their asset-purchase program valued at 30 trillion yen, along with a credit loan program for businesses valued at 35 trillion yen. A hold on rates allowed the yen to rise to a one-month high overnight against the USD as interest rate differentials continue to drive the direction of the pair.

The yen usually displays a strong negative correlation to the treasury yields in the United States: as treasury yields rise in the US (bonds weaken), we see the yen depreciate; when yields fall (and bonds strengthen), we see the yen strengthen. With the disastrous Non-Farm Payrolls report released Friday, renewed speculation of QE3 is making the rounds. As treasuries start to strengthen again in anticipation of possible further easing by Bernanke, the yen has reacted by posting strength against the Big Dollar while every other currency seems to be falling.

North Korea has also been garnering worldwide scrutiny as tensions on the Korean Peninsula continue to mount. In his first show of strength since his father died, Kim Jong-un has decided to press on with the assembly and launch of a long-range missile. This has been the cause of a selloff in the South Korean won (KRW) over the last five trading sessions. Increasing volatility in the currency is likely the byproduct of trader anxiety, as any military confrontation with the North would be disastrous for the South Korean economy.

Dollar Smirking?

Yesterday, an interesting research article from Goldman Sachs came across our trading desk outlining a new trading relationship dubbed the "US Dollar Smirk.” The article suggested that the US dollar makes gains anytime there is a data announcement that is far outside expectations. A large positive surprise means the US economy is doing well, and the USD gains. A large negative surprise means the US economy is tanking, and the USD gains on a bid to safety. Goldman Sachs argues that it is only when data comes in at expectations that we are seeing dollar weakness.The smirk is a visual representation for the U-shaped distribution of returns that result.

This is a very interesting theory, and short-term observations over the last few weeks at least seem to give it credence. The last two Non-Farm Payrolls releases are excellent examples, as March’s release was a positive surprise, with the USD gaining, while April’s was a large miss—with the USD gaining.

Two observations don’t call for a new law, but for interested readers, this is definitely a pattern to watch over the coming months.

[bopll]

Thanks Machine for all the interesting and pertinent articles you bring to DV.