Current Market behavior – Observation of 03.06.2016 By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

June 30, 2016 | Posted by bobbysrinivasan << back to blog

The day is June 3, 2016 Friday. The US Fed announced its survey figure of the non-farm payroll for May. The market which is a consensus of the opinion of the macro-economic exports in the US predicted that the number of new jobs created for the month of May 2016 would be around 160000. The data takes into consideration many factors including the rain, work delay due to strikes, lay off, etc. to arrive at this number. Most importantly the market believes their prediction and act accordingly. The announcement at 8.30 Am. EST (6 Pm in IST) sent a shock wave across the world. The number was a mere 38000. To top it off, they revised the earlier month’s figure (April 2016) significantly downward. When the news was released the market reacted very quickly. The price of gold to start with shot up immediately. At the time of announcement it was 1244 an ounce. In a few days of time it touched $ 1310 where it stands to-day. As an experiential trader, one should know that whenever the job creation expected is lower the price of gold will move up significantly and vice versa.

The currency values of the US trading competitors namely the euro, yen and sterling also moved up against the dollar. But their price movements were muted since these countries carried their own baggage of misery. Euro which is currently going through monthly quantitative easing is in a deep economic mess and with no probability of recovering in the near term.

Yen is in a equally disturbed condition with failed abenomics deflation and negative interest rate. Japan is in a long term recession with demographic and massive budget debt problem. However its value is increasing because of its carry on currency status. Demand for Yen always increase because of its very low rate of interest.

The Pound has seen better days. The economy of the country is in a mess. Even with the pumping of 600 billion pound through quantitative easing has not helped. Currently they went to the poll on June 23, 2016 to determine whether this should stay with the Euro union and decided to exit. The currency Pound lost 15% value in a single day.

Coming back to the US data, the question arises as to whether it is temporary, a short-term trend. Because of 4 trillion quantitative easing money, Obama’s government produced nearly 20 million jobs over 8 years. This process of adding fiat currency into the economy was stopped by Janet Yedlin in October 2013. Is the impact worn off? The current US employment rate of 4.7% and is very enviable considering how it is panning out in other countries.

Finally, the Fed which had planned to increase the interest rate atleast 4 times in 2016 but now is hardly in a position to act on it. The Fed’s balance sheet is overloaded with debt securities. The debt equity ratio is becoming a matter of concern. For a trader, it is a good trading opportunity namely to buy gold with a target price to sell and to buy yen which is a carry on currency. The pound and the euro are in a long term decline, a short-strangled would yield the best return.

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