One of the key stories of 2009 was the the risk-on / risk-off trade which closely tied currency movements with changes in the S&P 500. The switch between risk-on and risk-off was probable the single greatest risk for trading currencies in 2009. The stock market DXY index showed some of the highest sustained negative correlations in the decade. The relationship between stock prices and currencies has never been very stable, but 2009 as notable for the strength of the relationship and its relative stability throughout the year. We are starting to see a change in the last month and this may be one of the key trading relationships for 2010.
What was the risk-on trade? Every time the stock market started to move positive, there was a dollar decline as investors believed that a recovery was in hand. Investors moved from the dollar safe haven to other parts of the globe. A stock market decline would pull the global money back into the dollar. Some of these flows were associated with investors wanting to hold higher beta risk. Some was also associated with the belief that emerging markets were gong to do better than the US. This was realized. The total return for the US lagged the rest of the world especially for emerging markets.
SPY - 27.64% YTD
EFA - 28.37% YTD
EEM - 67.63% YTD
In December the picture changed with the stock gains associated with dollar increases. The switch has now been that rising stocks suggest stronger economy which has caused money flows to increase the value of the dollar. So what is difference between these periods? It is hard to say other than the first part of the year was still a reversal of the flight to quality flows from the fourth quarter of 2008. The market is now focused on the US economy as a place for investments and not as a place for safety at this time. Of course, this story is a description not based on actual numbers for the month.
We will have to look at the change in TIC flows to see the change in behavior. The latest Treasury numbers are from October (released on December 18th) and they show a slowdown in the purchase of US securities by foreigners. Stock purchases were down about $5 billion for the month. The net purchase of foreign asset by US investors was down with US investors being net sellers. This is a trend that has picked up. We have clear evidence that US investors have changed direction in the last few months. This is significant and may be the driver we are looking for. The US investor has gone from a net buyer of foreign stocks to a net seller to the tune of almost $20 billion. This change in US investor flow may be worth watching.
What was the risk-on trade? Every time the stock market started to move positive, there was a dollar decline as investors believed that a recovery was in hand. Investors moved from the dollar safe haven to other parts of the globe. A stock market decline would pull the global money back into the dollar. Some of these flows were associated with investors wanting to hold higher beta risk. Some was also associated with the belief that emerging markets were gong to do better than the US. This was realized. The total return for the US lagged the rest of the world especially for emerging markets.
SPY - 27.64% YTD
EFA - 28.37% YTD
EEM - 67.63% YTD
In December the picture changed with the stock gains associated with dollar increases. The switch has now been that rising stocks suggest stronger economy which has caused money flows to increase the value of the dollar. So what is difference between these periods? It is hard to say other than the first part of the year was still a reversal of the flight to quality flows from the fourth quarter of 2008. The market is now focused on the US economy as a place for investments and not as a place for safety at this time. Of course, this story is a description not based on actual numbers for the month.
We will have to look at the change in TIC flows to see the change in behavior. The latest Treasury numbers are from October (released on December 18th) and they show a slowdown in the purchase of US securities by foreigners. Stock purchases were down about $5 billion for the month. The net purchase of foreign asset by US investors was down with US investors being net sellers. This is a trend that has picked up. We have clear evidence that US investors have changed direction in the last few months. This is significant and may be the driver we are looking for. The US investor has gone from a net buyer of foreign stocks to a net seller to the tune of almost $20 billion. This change in US investor flow may be worth watching.
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