Risk Appetite Returns to the FX Market as Global Concerns Begin To Ease

The buzzword among financial analysts and economists over recent weeks has been “Double-Dip.”  This phrase is, of course, referring to the possibility of a Double-Dip recession, which would lead to a retest of global equity lows, a drastic increase unemployment, and general economic unrest throughout the world.  This week, however, much this concern has been laid to rest as a consistent swarm of positive data has emerged from several countries, indicating that we may be on a sure path to continued growth in the world economy.

A recession is defined as two consecutive quarters that yield contracting economic growth as measured by GDP.  Currently, every major developed nation in the world has emerged from “recession”; however, it is the threat of a return to economic stagnation that has worried investors and economists lately.  Once a bottom is hit during a recession, as ours was in March of 2009, the general trend usually involves a slow, but steady, return to normal economic conditions, including growth as measured by GDP, employment, inflation, etc.  Each of the 3 major players in the world economy, the United States of America, England, and the EuroZone, are each facing their own problems as these countries seek to establish a self-sustaining recovery. 

Investors have been looking for confirmation that this recovery is not beginning to stall.  In the United States, most investor attention is currently on employment figures.  As a country begins to emerge from recession, it is of dire importance that unemployment fall.  If unemployment stays at stubbornly high levels, as it has been in the United States, it makes a full recovery very difficult because high unemployment has a spillover effect into consumer demand, which ultimately leads to a very difficult recovery.  When the labor market outlook is poor, consumer sentiment tends to be weak.  When consumer sentiment is weak, consumer spending tends to decrease.  And when consumer spending is weak, then economic growth tends to lag as people are not buying goods and services.

Because of this threatening cycle, heavy attention has been placed upon the labor market, since employment has proved to be staying at uncomfortably high levels.  However, this week saw a solid boost to the labor market outlook in the U.S.  Weekly jobless claims fell from 472k to 454k and claims fell from 4.637 million to 4.413 million.  Although these figures are not a sure indicator of a fully powered labor market, they do offer investors a bit more confidence and surety that the U.S. labor market, albeit still weak, is consistently improving.  A consistently improving labor market is what investors want to see in the U.S.  It is understandable that the recovery is slow because of the depth of collapse we experienced during the Crisis, but it is imperative that we see the labor market continue to post steady gains.  A contraction in the labor market could prove to be catastrophic.

With the upbeat employment data in the U.S., there was also a steady release of positive data throughout other countries that served to further bolster investor confidence and add to risk appetite in the FX Market.  Jean-Claude Trichet remained very hawkish concerning the EuroZone Debt Crisis.  He re-emphasized the point that the market was overly pessimistic a few months ago when the Euro was crashing to a 4 year low and the threat of sovereign default seemed to be very high.  While Trichet’s view is debatable, it does seem true that struggling EuroZone countries have quickly adopted very stringent fiscal austerity measures, which is reassuring investors that these countries are willing to do what it takes to evade sovereign default and revive their economies to healthy and responsible economic growth.

Canada also released employment figures today that were far better than economists had anticipated.  This release was on the heels of Australian employment figures that also beat market expectations by quite a large margin.  This wave of positive employment data from the U.S., Canada, and Australia is serving to support investor confidence, and this could be the impetus the market needs in order to press to higher levels for the Euro, Pound, and Aussie in forex trading.  Of course, this increase of risk appetite in the market will spell trouble for low-yielding currencies such as the U.S. Dollar and Japanese Yen.

In the coming weeks, if a continued wave of positive economic data begins to come out of the U.S. and Europe, we should see a strong bout of risk appetite enter the FX Market and push these currency pairs to higher levels.  Of course, this could all be offset by bad news out of the EuroZone.  Any further scares of sovereign default could destroy any chance of a rally in the Euro and Pound.