Although it's too early to know for sure, Friday's action suggests we could be seeing the earliest stages of a carry trade reversal. Remember that hedge funds and other highly leveraged institutional investors have been borrowing here in the United States at ultra-low interest rates, selling the dollar short, and using the proceeds to snap up stocks, bonds, and gold.
Stocks rocked and rolled on Friday as traders reacted to a better-than-expected jobs report for November. Payrolls dropped just 11,000 and the unemployment rate fell to 10%. The consensus was expecting a payroll drop of 100,000 and the unemployment to remain at 10.2%. Sure, employers still made cuts. But by all indications were on the cusp of a job market turnaround.
An initial early morning blast took small cap stocks up as much as 3% before sellers emerged. The main concern was that a strong economy will force the U.S. Federal Reserve to drop its easy money policy that has it purchasing some $3 billion in mortgage-backed securities (MBS) per day while keeping short-term interest rates pegged near zero. The futures market now pegs the probability of an interest rate increase by August 2010 at 100%.