A week ago I opined about how the USD will begin to trade higher on good internal numbers coming out of the United States. I also stated my belief that such an event will portend the return to a dollar bull market as investment comes home, and foreign investors turn to the US as the most promising growth opportunity within the advanced economies. I was not expecting to be posting this so soon, but today, we saw the first signs of shift towards market conditions I outlined a mere ten days ago. Jobs numbers surprised to the upside today, and rather than trigger a flurry of indiscriminate risk buying which would ironically ding the dollar and buoy everything else, the market chose distinct winners and losers today. To start off, EUR/USD got hammered today which makes sense. The strong jobs reports signals a US led recovery, while Europe remains mired in uncertainty as it slowly works through its sovereign debt crisis. Under this scenario, it is perfectly reasonable for the market to expect capital flows from Europe to the US and reprice EUR/USD accordingly. Cable, was also down today, off its 1.6130 highs of earlier this week. Again, the British economy stands to fair worse if the US (rather than Europe) leads the recovery among advanced economies. AUD/USD was down too, not so much a loss of confidence in the Austrailian economy, but more of "pressure release" as the dollar rose against EUR. The dip in EUR/AUD confirms this hypothesis. Floundering emerging markets like South Africa got whacked on the job news too. The RSA is experiencing internal labor unrest, and relies on Europe for the majority of its exports. Finally, JPY was a huge loser today. Bought as a safe haven asset, the mid to long term economic prospects for Japan are shaky at best. Expect to see further weakness in the Yen as the US recovery picks up steam.
The winners today were, not surprisingly CAD and MXN, economies which stand to gain the most from robust US growth. USD/CAD traded back below parity. USD/MXN was under some significant pressure and dropped down to 12.9272. It was unable to gain a foothold however, and was pushed back to 13.03 where it started the trading day as actors booked profits. This suggests that USD/MXN is already a crowded trade, and it may take some sustained and clear real money flows to Mexico for the Peso to break through. Watch remittances in dollar terms (they are down big in peso terms mainly due to peso appreciation!) and flows on export demand and tourism. The local bond market is also a place cautious investors will seek yield as the Fed has signaled that it will continued to keep interest rates low until 2015. A sovereign upgrade, a rate hike, or a large acquisition in Mexico by a US firm would as be very supportive of the Peso. I continue to hold my large long peso position, but I now realize that it will be a slower grind towards my 12.55 target than originally anticipated.
In short, we may in in for a dollar bull market as investors around the globe turn to the US as the dog with the least amount of flees. I am still bullish on Mexico, but funding buying MXN against JPY rather than USD just got much more attractive.
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