The inverted correlation has been a rule of thumb for traders particularly with the release of big figures, such as US NFP today. But the up beating numbers with unemployment rate falling to 7.7% and the economy adding 236K new jobs, highest in a year, saw market reacting exactly the opposite. Stocks gained along with dollar; investors did not trade on sentiment, but actually traded dollar strength. So is that how things are going to be now? Seems likely. This last week has proved so, with stocks higher and high yielders lower, except during ECB latest economic policy.
But new winds are blowing in the forex market, and dollar is gaining track: dollar index reached an 82.60 high this week and trades above 82.00, levels not seen since August last year. The American economy heads north, and retrieving QE sounds louder, despite chances are still low. But the year is just starting, and time will tell. Just from now on, investors will have to think twice before trading on risk.
If market decides to trade economic growth and ignore drama headlines, then the natural outcome will be further dollar strength. Europe and the UK can’t still see the light at the end of the tunnel, while Japan will continue fighting deflation with its printing machine. Investors now believe the US economic engines are working for good.
There is however, one grey cloud in this scenario: market addiction to QE: will stocks continue rising, and USD along with them if the FED actually retrieves facilities? Hard to tell at this point, but one think I s certain: the end of a cycle is here, and a new one is about to start. And there’s nothing we can do about that.