Is the Forex market going back to normal?
Posted by Yohay Elam in Forex Trader Network, Market Analysis, tags: forex expectations, forex risk, risk appetite in forex market, risk aversion in forex market, safe haven currency
The tables are turning on the American job market, as seen in the excellent Non-Farm Payrolls. Also the forex market’s reaction looks different than we got used to in the past year. Is the forex market getting back to normal? The Currensee community foresaw the dollar’s strength.
American employment figures included three positive surprises: a drop of only 11K jobs, a revised loss of 111K jobs last month (revised from 190K) and a lower unemployment rate – 10%. The reaction in the forex markets was a surge of the dollar across the board.
Currensee Community forecast proved correct
Before diving into the risk factor, let’s look at the Currensee community. Did they expect good or bad employment figures? Well, for many forex traders, especially techies, this isn’t the question. The question is: did they foresee the dollar’s leap?
The answer is yes. According to a survey, 80% of the community predicted the strengthening on the dollar across the board. The community was more certain about certain currencies than others. I find these figures quite interesting:
EUR/USD 65% short
GBP/USD 75% short
USD/JPY 97% Long
USD/CAD 97% Long
The Risk Factor
In the past year since the breakout of the financial crisis, good news would usually send the dollar down. Why? Risk appetite. When the world economy, led by the US, is showing signs of recovery, there is less demand for the dollar, the safe haven currency. Bad American news cause traders to flock to the safe haven currency – the dollar. Risk appetite and risk aversion are phrases we got used to.
Absurd? Yes. But that’s how it worked.
But the reaction this time was different – the dollar made big gains across the board. The risk factor was out of the game. We can note two more correlations that were absent:
Dollar-Yen correlation – gone. The Japanese Yen is also a safe haven currency, usually offering a warmer harbor than the dollar. The dollar-yen correlation meant that when fear would appear, the dollar would strengthen against most counterparts, but would lose ground to the yen. And when the dollar lost ground, the Yen would lose even more.
Well, the dollar made huge gains against the Yen as well.
EUR/USD – S&P 500 correlation – The second correlation that was broken is even stronger. Also here, bad news would send the dollar up and the stocks down, while good new would send the dollar down and the stocks up. EUR/USD, the world’s most popular pair reflects this correlation in the strongest manner.
The good employment figures sent the dollar and the stocks up together.
Almost two years of jobs losses in the US have almost come to an end. Is a significant characteristic of forex trading also coming to an end?
The major American indicators in the upcoming week are the weekly jobless claims on Thursday and retail sales on Friday. We will see how the markets react to this data, and how the community predicts them, after being correct about the NFP.
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