Better US GDP Revives Recovery Trade

Last updated 10/29/2009 9:17 AM ET (GMT -5) 6 Comments

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Boris Schlossberg

Director of Currency Research, GFT

US GDP printed much stronger than expected at 3.5% versus estimates of 3.2% sparking a fresh round of buying in risk currencies as the recovery theme was revived. Personal consumption rose at a 3.4% annualized versus 3.1% eyed indicating that the consumer rebounded in Q3 despite persistent labor market weakness in the US economy. The rise in the GDP was the first since the second quarter of 2008 suggesting that the contraction in the US economy is over for now.

The news put to rest concerns that the global recovery was running out of steam and reversed the risk aversion flows that have dominated the currency market all week long. Although the bears have argued that the rebound in US economic activity will be lackluster, today’s data contradicts that notion and indicates the bullish case must be respected for the time being.

The EUR/USD& nbsp;skyrocketed by more than a cent as the massive short covering kicked in. After the pair was unable to hold the 1.5000 figure last week, bears piled into the trade on the assumption that a major top was in place. Today’s GDP data caught many of them wrong footed propelling the move higher.

Despite today’s better than expected news the sustainability of this recovery depends on the improvement of US labor conditions. To that end, the weekly jobless claims provided little help to the bulls by rising to 530K from 525K projected. The figure remains stubbornly above the 500K barrier and until it drops below that level the market will not be fully confident that the recovery has taken hold.

After bouncing strongly in pre-market trade, risk FX will now take its cue from equities and unless stocks see a sharp sell off the gains made this morning should remain in place.

Comments (6)

Hari

October 29, 2009 at 03:42 PM ET

Hi Boris,
The price action after the news event was interesting. With US GDP reported higher than expected, USD should get stronger, in turn , eurusd should have gone down on release of news but it went up. USDJPY also went up simultaneously. What could be reason for eurusd going up despite USD supposedly to become stronger. If you recall when UK GDP went down, GBP also weakened & in turn GBPUSD went down on news release.
What was the reason for eurusd to go up. Could you throw some light on this.
Regards.

Wanna Be

October 29, 2009 at 04:06 PM ET

Eur/Usd going up is because of people chasing the stocks higher thinking "good times are here again" mentality. Eur/Usd is heavily tied in with the stock market. Also the term "expected" is a poor choice of words. They can expect anything they want. If you really wanted to excite the stock market or FX market just say you expect growth of 1.5% or lower so that when 3.5% is printed people would really go nuts. The numbers do not reflect reality.

bschlossberg

October 29, 2009 at 04:20 PM ET

Good US GDP data is seen as positive for global recovery trade. US was seen as a laggard and now that it appears to be catching up the recovery trade is back on and that means flow to risk currencies. So although this may seem to be positive for USD its actually much more positive for risk appetite and that's why USD fell

GORODN

October 29, 2009 at 07:32 PM ET

Hari this is a trading market with banks and hedge funds moving it up and down. All i can say is you have to trade what you see going on and not what you think should be happening even if you are a 100% accurt. in your rational. Don't fight the trends go with them and be ready for changes when they come..BOL

Wanna Be

October 29, 2009 at 04:02 PM ET

These GDP numbers do not reflect the real growth of the economy. They are bogus. It was during the "tax payer buys a clunker" program. It is estimated it cost the tax payer upwards of $24,000 per car. This also overstates the personal consumption as well. This is a subsidized growth. The labor market weakens yet personal consumption goes up as well as the GDP! I don't think so. The rise of the stock market is also "fake" most companies reporting better EPS is strickly because of cutting cost, trimming the fat, not growth of business. It is a house of cards right now. When they revise the 3Q numbers it will be lower. Just my humble opinion.

GORODN

October 29, 2009 at 07:27 PM ET

Wanna Be. you are right in what you say! Personally i don't believe what was posted because it is BOGUS. However this is a trading market and if it wants to go higher than I go higher with it and vice versa if you know what i mean.

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.