US Recession Confirmed

At long last, the National Bureau of Economic Research (NBER) declared that the US economic recession started in December 2007. Since the end of Bretton Woods, the US economy experienced two long recessions lasting 17 months. The first major recession was triggered by the global oil shock and lasted from November 1973 to March 1975. The second major recession took place between July 1981 and November 1982 after the global commodity boom. In both episodes, the Dow Jones Industrial Average bottomed three months before the end of the official recession. If history repeats itself, the Dow should bottom in February 2009, in anticipation of the projected end of the recession in May 2009. If so, we may finally be able to see the beginning of the end of this long crisis that started last July.

In this regard, the same can probably be said for risk aversion and the unwinding of JPY carry trades. While some players still see more unwinding here, we find it difficult to ignore the policy risks that accompany this strategy. The USD faces downside risks from an ultra-accommodative monetary policy and expansive fiscal policy in the US. The JPY faces increasing risk from Japanese policymakers viewing, more and more, excessive JPY volatility as a threat to the Japanese economy. G7 nations are uncomfortable with the stress to emerging markets posed by the recovery in both USD and JPY. These are the issues that players must also consider in their currency strategies, which at this moment, risks being too naïve in discounting interest rate differentials. The market landscape will probably look different next week, after all the central bank meetings this week.