I am not sure how to interpret the dramatic appreciation of the dollar vs. the Euro and Yen over the past month. For months leading up to this reversal, most attributed a significant portion of the strength in US equities to dollar depreciation.
Over the past month, EUR/USD has contracted by nearly 6%, while the S&P has remained essentially flat over the same time period.
Either the relationship between dollar depreciation and US equity strength was coincedental, or the equity markets are viewing the recent dollar rally as a short-covering/technical phenomenon that is likely to reverse over the near-term.
The dollar rally was triggered by Dubai, followed by short-covering (in my opinion). I don't believe our economy will experience a V-shaped recovery in 2010 (therefore no increase in short-term rates in 2010). That said, a material double-dip seems unlikely given the massive and ongoing flood of liquidity from the Fed (and the pending influence of whatever additional stimulus Congress provides).
I do believe the supply of dollars will continue to out-weigh demand over the near-term (given historically high liquidity from the Fed and Treasury), a Congress which appears very willing and increasingly able to spend at will (regardless of the potential long-term consequences), and an increasingly ugly projected national debt/GDP ratio.
If the dollar does resume what I view to be a secular decline (that is currently experiencing a short-term cyclical reversal), I can't help but think US equities will respond favorably.
Over the past couple of weeks, the dolts on CNBC have been declaring an official de-coupling of the relationship between the dollar and US equities. I am not so sure.
Whoever can properly interpret the recent movement in the dollar, and the relationship (or lack thereof) between the dollar and US equities, stands to make a lot of money.
I think the dollar strength is a cyclical blip in the middle of a secular down-trend. I am also of the belief that if the dollar resumes its secular decline, the relationship between dollar depreciation and US equity strength will magically re-appear.
I am not yet willing to make big bets on this point of view, as I think financial fundamentals stink, and will continue to stink well into the foreseeable future.
Anybody have any reasonably intelligent thoughts on the matter?
Here is a broader discussion, the jury is still out, however, it does not appear realistic to assume that the correlation is broken at this point.
My current position - CALL Options on UUP for March with a boat load of PUTs and Shorts on broader market, financials, oil, gold.
I find it interesting that the dollar is going up precisely around the holiday season when there is an extreme lack of liquidity. Just when you think there is a inverse relationship between the dollar and the equities markets, the dollar short trade starts to unwind and that relationship disappears. It seems an almost perfect time turn the dollar and still be able to work the markets. I wonder if the dollar will be driven up through the end of the year only to be turned down come the start of 2010. I also see a solid base for gold at $1k. Looking at the time we have left for the rest of the year, they could drive gold down to $1k. This could also put the dollar at 79.50 to 80.00. I also think the equities market hold or push slightly higher with a possible rally at the start of the new year as they put the dollar short back on. I hope I am wrong but it seems that this is the way they want to push things. Once they drive the equities markets high enough, they can raise rates while allowing a bigger cushion for the market to fall. But then again I am Technically a fundamental idiot.
lol...of late, you have been "wasting" a lot of time posting. if your "proprietary" program was as effective and accurate as you claim, you would be a multi-millionaire, and you would presumably have a long list of better things to do than post on this board at all.
As the economy is perceived to get better, you're watching traders unwind the dollar carry trade. Its like a game of musical chairs and no one wants to be in the trade when the music stops and the Fed raises rates.
Thus, from a technical standpoint its a short covering rally.
From a fundamental standpoint, it isn't that the US is strong, just stronger than Japan, UK, and EU which have worse problems than we do. This causes the dollar to climb.
So from the above, there is what appears to be a decoupling of dollar down, market up to dollar up, market consolidate.
From here, the question will be "how long before the bond market forces the Fed to raise rates"? From the price direction of the TLT, the bond market will force the Fed's hand sooner than the Fed would like.
Then stocks go down as the Fed has to raise rates AND THEN, inflation rears its ugly little head anyway and stocks go down some more.
Hope its like 1969-1979 and not 1929-1955.
Thats my theory but i'm more than willing to listen to others.
basher...haven't seen you here before...but that is a solid post. The dollar short is clearly unwinding. the question is why? is it a dubai/greece/spain-driven flight to quality, or an increasing fear of a v-shaped recovery and the threat of rising short-term interest rates?? i don't know the answer. my opinion is that a trigger-happy flight to quality (driven by dubai) resulted in a short-covering of a crowded trade.
you make a really good point regarding relative comparison. even if the US economy remains stagnant, japan, the UK and the EU continue to look that much weaker (which contributes to the recent reversal of the yen and euro vs. the dollar).
you make another really good point regarding the recent action in the long end of the treasury curve. what i can't figure out is if the recent increase in the ten-year bond yield is being driven by growth/inflation fears, or a simple re-calibration between yield requirements and future supply expectations.
I see commodity/consumer staple inflation as legit. discretionary inflation, however, is way off the radar screen. look at apparel, shoes, cameras, flat screens, computers, new cars and houses. deflationary pressures remain, in my view. this suggests to me that the long-end of the treasury curve is responding more substantially to growing fears over future supply.
I am in the bearish camp regarding stocks, but wonder/worry about what happens if the dollar resumes its "orderly" collapse, and the impact on equities (given what we have seen in the past).