In the face of today’s 200 point positive and negative swings in the Dow, it could be argued that the US dollar has been relatively stable if you only look at the daily change of the 3 major currency pairs. The EUR/USD rallied 100 pips, the GBP/USD was unchanged while USD/JPY fell 75 pips. This compares to multi hundred pip moves for all 3 currency pairs on Wednesday.

Even the largest market movers had a far milder move today than yesterday. On a percentage basis, the largest market mover was AUD/JPY which dropped 1.09% while it was CAD/JPY yesterday which dropped five times that amount. These moves however masks the volatility that we are still seeing on an intraday basis; the EUR/USD hit a new 20 month low while the GBP/USD fell to a fresh 5 year low.

Although it may be very tempting to say that the dollar has hit a top, especially against the Euro, in order for this EUR/USD rally to be real and for investors to be convinced to stop selling higher yielding currencies, we need to see stabilization in the financial markets and a return of confidence.

Keep an Eye on Job Losses

Even though the non-farm payrolls report is not due for another 2 weeks, all signs point to serious job losses and for that reason we are still concerned about the outlook for the US economy and by extension we are also wary of today’s rally in US equities. According to the Financial Times, more than 78,000 people could be laid off from Wall Street. For the world outside of finance, massive job cuts have also been announced by companies like Yahoo, Merck and General Motors. Although we will not get to the double digit unemployment rates that we saw during the Great depression, we do expect the current unemployment rate to climb to a new 5 year high. Since consumer spending is the backbone of the US economy, a weak labor market will depress spending, which should in turn lead to softer growth. Therefore even though buyers have returned to the equity markets, there will be plenty of reasons for them to bail once again.

Emerging Markets to Welcome any Dollar Correction

Any correction in the US dollar will be cheered by the emerging market nations who have had to take drastic measures to combat the dollar’s strength against their own currencies. The rally in the greenback has taken a big toll on the Brazilian Real, South African Rand, Hungarian Forint, Turkish Lira and Polish Zloty. In order to avoid a mass exodus out of their local currencies, central banks of some of these countries have been forced to raise interest rates. Since the strength of the dollar has been the primary catalyst for the sharp decline in these currencies, a correction would be welcomed by all of these nations because it would help stabilize their currencies and make their jobs a lot easier.

Oil Prices Could Bottom on OPEC Production Cuts

US existing home sales are due for release tomorrow but the biggest event risk is undoubtedly the emergency meeting by OPEC. Oil prices have firmed up today on the expectation of a 1 million to 1.5 million production cut from the oil producing nations. The price of crude has fallen more than 50 percent since its July highs, giving the OPEC nations a valid reason to cut interest rates. However since 2000, whenever oil prices have fallen by more than 20 percent on a rolling 6 month basis, production cuts have marked major turning points for oil prices. There is a decent chance that we have seen the bottom in oil prices and for the currency market that could fuel a rebound in the Euro and Canadian dollar.

Kathy Lien is Director of Currency Research at GFT, and runs KathyLien.com.