Jobs, GDP Will Keep US Dollar Strong
One of the most under-reported stories of the year has been the relatively strength of the US economy. This might seem like an almost impossible assertion to make: How could investors possibly be overlooking strength in the largest economy in the world? But the reality is that recent weakness in the US Dollar is suggestive of a lack of confidence in the actions of the Federal Reserve. Most investors have based their positions in the US Dollar on the changing likelihood that we will see quantitative easing tapering before the end of the year. But what about the underlying economic data? How have growth prospects in the US fared when compared to the other major developed nations? The answer might surprise you, especially if you have been following the recent performance of the US Dollar.
Recent Strength in the Euro, Pound
“In the last few months, two of the best performers in the currency markets been the Euro and the British Pound,” said Rick Bartlett at CornerTrader. “The Euro has hit highs in the upper 1.30s, while the British Pound as risen to highs just below 1.65.” But the real question investors should be asking is whether or not these rallies have been justified. Are markets really choosing the best currencies to buy? Do the underlying economic releases support the decisions to send higher the Euro and Pound relative to the US Dollar?
Jobs, GDP Data Remains Supportive
The answer to these questions is a very clear “no.” GDP growth in the US is now far outpacing what is seen in the UK and in the Eurozone, with third quarter results coming in at 3.6%. This is week above the 0.8% that was posted in the UK during the same period. Bigger inventory levels in the US have been one supportive factor, but another key area to watch has been seen in the labor markets, with the US economy now averaging more than 190,000 in the Non Farm Payrolls release over the last three months. This has been accompanied by a lower unemployment rate in the US at 7.0%, which is well below the 12.1% that is seen in the Eurozone.
What does this mean for investors? This essentially means that we are likely to see major rallies in the US Dollar as we head into 2014. The market has positioned itself too far in one direction, and that direction is not supported by the underlying market data. There is very little reason to bet on the economies in the UK and Eurozone, especially when compared to what is currently happening in the US. As such, traders should expect some major corrections in the greenback as we start the first weeks of 2014.