Why Currencies Should Recover in Obama's First 100 Days

In yesterday’s Daily Currency Focus we warned that investors should not bank on an Obama bounce. Based upon 5 decades worth of data, the Dow Jones Industrial Average fell more often than it rose on Inauguration Day.

In fact stocks fell more on Barack Obama’s Inauguration Day than any other President over the past 50 years outside of Lyndon Johnson’s first Inauguration in 1963.

Since currencies are taking their cue from equities, we have seen a sharp slide in almost all of the major currency pairs. The dollar has outperformed the Euro and British pound but its decline against the Japanese Yen indicating that the dollar’s rally is a reflection of pessimism and not optimism.

We are seeing a flight to safety into US dollars but bonds are the instruments of choice and not equities. Obama inherits a very troubled economy and he certainly has his work cut out for him over the next few years. However brighter times may lie ahead for US stocks baseCurrencies:

What to Expect in Obama’s First 100 DaysThe first 100 days of an Administration can define a President.

Barack Obama is expected to usher in a number of reforms that may help to reinvigorate the American economy and boost consumer confidence. The fact that stocks have fallen more than 8 percent since the beginning of the year provides a low base for any bounce.

More importantly however we typically see the Dow rise in the first 100 days of a new President’s Administration as investors become optimistic about new policies. Stocks rose in the first 100 days of a President’s term 11 out of 16 times.

Political party doesn’t really matter but of the 5 times that equities dropped in the first 100 days, 4 out of the 5 was during Republican Presidencies. So even though President Obama is handed an ailing economy, the silver lining is that history is on his side and most likely he will be celebrating a stronger stock market after his first 100 days in office.

A stronger stock market should mean a recovery of risk appetite, which could help reverse some of the losses that we have seen today in the EUR/USD, GBP/USD and USD/JPY. It is important to keep in mind that a rally is not guaranteed as the recession in the US economy is the worst since the Great Depression.

The economic outlook can weigh on equities which would diminish the significance of the historical price pattern.d upon the performance of the Dow in the first 100 days on a President’s term.