US Dollar: Record Close for US Stocks Limit Losses in Carry Trades

Not only did US stocks not react to the 6.5 percent drop in Chinese shares, but the Dow Jones Industrial Average hit a new record high on both a closing and intraday basis. Having started the day down 60 points, today?s move is nothing short of impressive.

The risk appetite of US stock traders is voracious as they completely shrug off the losses in Shanghai. Currency traders on the other hand were more cautious and less optimistic. Most of the carry trades with the exception of AUD/JPY and NZD/JPY are still down on the day despite some intraday recovery, raising the question of which market is right. This may perhaps be more of a question of long term versus short term as the move in US stocks signals a potentially strong recovery in Chinese stocks tonight. The problem is that if the Chinese market does not continue to fall and instead recovers its losses to hit another record high like it did back in February, the Chinese government will become extremely agitated. Their only response will be to do more rather than less to cool the bubble which will eventually hit carry as well as the US stock market. In the short term however Chinese traders will be delighted by this rally. Economic data however was not as supportive with both the ADP employment survey and Hudson employment index falling short of expectations. The market is looking for 135k jobs to have been added to US payrolls this month with the estimates ranging from 224k to 45k. These numbers already include any revisions by analysts in reaction to today?s 97k ADP reading. The softer leading indicators for payrolls do suggest the possibility of weak job growth, but we believe that there is still a decent chance that we could see more than 150k job growth. The last time the 4 week moving average for jobless claims were as low as they were in May was in February 2006. At that time, US corporations added 300k jobs to their payrolls, a 100k more than the previous month. We will cover payrolls more tomorrow, since we are expecting revisions to first quarter GDP, the employment index, Chicago PMI, jobless claims and construction spending in the next 24 hours. The big market mover tomorrow should be GDP. The market is current looking for a downward revision to growth which if true, would take some steam out of the stock market and dollar rally. The minutes from the FOMC meeting released today triggered the move higher in the Dow even though there were no surprises. The bottom line is that FOMC still intends to keep rates unchanged until the end of the year and the futures curve reflects that.