Sometimes, image is everything. While appearances are always important, this couldn’t be more true than in world markets. As a result, it looks like the market is starting 2010 like gang-busters, projecting confidence and bravado in the face of nebulous economic conditions.
Gold and oil are up some 2.5% this morning, and US stock markets have all opened up near 1.00% higher. This is a classic risk-taking scenario. So where would you expect the US dollar (USD) to be?
Well, if you follow this blog, you would know that the dollar is down today and you would also know that the commodity currencies– the Aussie, Kiwi, and Loonie- are up. So investors are seeking out higher-yielding currencies as their outlook is “positive”, at least in the near-term.
Some of this can be attributed to the “January Effect” in the markets– that is that investors are putting capital to work in the new year as they’ve sold all of their losers last year in December in order to offset some capital gains. At least that’s the conventional interpretation.
Only last year wasn’t very conventional at all. In fact, I would go out on a limb (not really) to say that last year was a more UN-conventional year than we’ve seen in a long time. Except for 2008. Well, you get the idea.
My point is that as I’m not 100% percent ready to buy into the party line so to speak, and that I’m still going to be watching the stock market closely for clues as to what might happen with the currencies. I’m still not convinced that we won’t have a major sell-off as investors look to take some gains from 2009 and push their tax liability forward to April 2011.
So if we do see some selling, we could move back to the risk-taking/ risk-aversion type of trading in the currency market that we saw for most of last year. Also to note is that what the US Fed decides to do with interest rates will be of major importance to set the tone for the first half of the year.
We may also see some shuffling of the “ranking” of currencies in the risk scenario, as the fundamental economic conditions of different regions become more transparent and we see which economies seem to be doing better than others.
So much like the end of last year, I’m going to keep my trading short-term as I wait for some fundamental news to set the tone. This Friday’s US employment report could be just that.
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