Disappointing December Jobs Report May Signal An End to the Dollar’s Relief Rally

The dollar’s recent relief rally stalled out December 23 (see chart below), and December’s disappointing jobs report may have officially ended it.

The apparent working thesis supporting the dollar’s relief rally has been an expectation that an imminent recovery in the labor market would motivate the Fed to raise interest rates sometime soon. December’s disappointing report provides one more reminder why the Fed will likely do few, if any, rate hikes this year (my current guess is that over the summer the Fed may TALK about the potential for rate hikes but will sit on its hands until after the critical November elections).

The continued strong performance in cyclicals also demonstrates that participants in the U.S. stock market are not worrying about higher interest rates. The weekly chart below shows cyclicals are off to a very strong start this year with a 7% year-to-date gain (versus 2.7% for the S&P 500).

The trading in individual currencies also suggests that the dollar’s rally may be ending soon if it is not already over.

In December, I noted how the Canadian dollar resisted the dollar’s advances during this relief rally. Add the Australian dollar to the club. The Australian dollar has resumed its strength against the U.S. dollar (see chart below – note that the Australian dollar is not part of the U.S. dollar index).

*All charts created using TeleChart:

Although the new Japanese finance minister officially declared a weaker yen policy (and was then promptly scolded by the Japanese prime minister!), the yen’s recent descent appears to be slowing (chart not shown). Note well that currency traders are notorious for pushing currencies counter to stated policies to test a country’s resolve and commitment.

The main caveat regarding a resumption of the U.S. dollar’s decline is that the euro (58% of the dollar index) and the British pound are heavily compromised by massive government debts and the threat of sovereign defaults. Together, I suspect the euro, the pound, and the U.S. dollar are all “equally bad” and will bounce around at current levels until some new catalyst arrives. The pound is currently scratching at 8-month lows against the dollar. While I remain very bearish on the pound, I also recognize that trading conditions periodically favor the pound. The euro is currently bouncing from 3-month lows against the dollar (charts not shown).

Be careful out there!

Full disclosure: long FXY, long FXA, short EUR/USD