Despite the ‘celebration’ following last Friday’s U.S. payroll report, our Foreign Exchange Strategy service does not recommend shifting to a more pro-cyclical currency stance.
A n improvement in the global economic outlook is the key fundamental reason to take on more risk in an investment portfolio. The U.S. payroll report was positive relative to expectations, but rather weak in absolute terms. Moreover, last week’s Fed and ECB meetings did little to lift our optimism. Several indicators continue to suggest it is too early to add to pro-cyclical currency trades.
- For example, the global leading economic indicator is still pointing down. More importantly, with no new stimulus measures announced this week, it is difficult to see the global LEIs inflect upwards.
- In addition, gold is a real-time monetary indicator and the peak in March 2008 correctly warned that deflation risks were escalating. Gold’s recovery in early 2009 (ahead of the bottom in equities) then accurately indicated that reflationary policies were finally gaining traction. Gold prices slipped back below $1,600/oz following this week’s Fed and ECB meetings. This suggests that major central banks are still behind the curve. As in early 2009, a sustained rally in gold will signal that the forces of reflation are starting to win out.
- Finally, an uptrend in Chinese stocks and an acceleration in Chinese money supply growth will be bullish signs for Chinese growth and the commodity complex.
Bottom line: It will take further proof that the global economy is stabilizing before augmenting a pro-cyclical currency investment stance.