Yesterday, Unemployment number came out at 4.7%, lower than the consensus of 4.9% survey of economists at all major banks. Much like the stock market where you have quarterly earnings numbers and analysts give their expected numbers, if earnings do not meet the expected numbers, the stock falls. Just look at Google this week, when its earnings did not meet analyst expectation, its stock price went from 401 two days ago to 378 yesterday, a free fall of 6%! This difference between expectation and actual number can jolt the market significantly.Â
With the recent installment of Bernanke in place of Greenspan’s retirement at the Fed, there was uncertainty as to how many more times the Fed will continue to raise rates. So this labor number was very important in shaping Bernanke’s first real rate hike decision. How does this affect your investment decisions exactly? Rising strength of the US Dollar. Here are two reasons why dollar will be stronger.
1)
Stronger economy suggests a stronger equity market and therefore investors abroad will want to exchange their home currency to US Dollar so that they can buy US stocks. This is assuming that US economy is stronger than their home economy. For example, Indian equity market has been booming the last few years, so Indian investors may not allocate their capital to the US. US economy is stronger relative
Japanese economy, so we can expect a rise in Dollar to Yen exchange rate, which indeed rose from 118.5 to 119.5 in the half hour after unemployment numbers came out at 8:30am EST.
2)
Currently the Fed Funds rate is at 4.5. The general consensus is that the Fed will raise it at least one more time in March to 4.75, but after that, there is no consensus. If the labor numbers (payroll numbers, unemployment rates) suggest a stronger growing economy, then it’s likely that Fed will continue to raise rates to hold back inflation. When Fed raises rates, deposit rates also rise. This makes the dollar stronger because investors have to exchange their currency to US dollar to deposit in US banks.
So how do you make an investment play if you were watching the unemployment numbers (Which comes out I believe at 8:30am on the first Friday of every month)? You could invest in the dollar short term. US dollar rose against Japanese yen for 1/2 hour after the stronger unemployment number. This is a knee jerk reaction of investors. However, this is in addition to recent Japanese central bank’s announcement that they will not raise rates (where as Fed is likely to raise rates in the US) in the immediate future. Knowing these two facts, we can make a short term investment in the dollar. I say short term because when the next unemployment numbers comes out or major news, that will again change the dynamics of this stronger dollar view.
One more interesting note, Warren Buffet and Bill Gates both are bearish on the dollar. No doubt they have lost money this week. In fact, Warren Buffet has been betting against the US Dollar since last year when US Dollar rose 15%. Take your picks!