DIRECTOR OF CURRENCY RESEARCH, GFT
LAST week’s dismal US unemployment data was a depressing reminder to the currency market that the American economy, which at one time served as the locomotive for global growth, may now be the laggard of the industrialised world.
While the recovery continues in the rest of the G20 universe with the labour markets from Germany to Japan to Canada showing signs of improvement and stabilisation, the employment situation in the US remains bleak. Last month’s loss of 263,000 jobs brings the total number for the year to more than 4m unemployed.
For currency traders, the net take away from last Friday’s unemployment report is that US rates will remain stationary for quite some time, leaving the dollar vulnerable to carry trade flows. In the post-war period the Federal Reserve has never tightened monetary policy until the unemployment rate has peaked, and this knowledge allows dollar bears to sell the greenback with impunity whenever risk appetite proves supportive, as they use the low yielding buck to fund purchases of such high-yielders like the Australian dollar.
The shakiness of the US labour markets suggests that consumer demand will remain muted for the foreseeable future, putting further pressure on the dollar as the US economy becomes the weakest link among the G10 nations.
The currencies of the two Anglo-Saxon economies in the West (UK and US), are both hobbled by the massive write offs in their financial sectors. As a result, they remain markedly weak while the currencies of the two Anglo-Saxon economies in the East (Australia and New Zealand) continue to outperform all other industrialised nations – a testament to the fact that China rather than the US is the driver of growth in the new economic world order.
Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read their daily commentary on currencies at www.GFTUK.com/commentary or e-mail them at BorisandKathy@gftuk.com.