Currencies, Stocks and Correlations


TOUGH CALL - I'm not sure what's going on with that correlation between US equities and the US Dollar. Many of you have asked me how I see the Euro trading in a world where stocks come off and to be honest, I can see it going both ways. If I were to tell you how I think it should play out it would be that I see the Euro selling off in a period of US equity weakness. The simple answer is safe haven flow into the US Dollar when the Yen and Swiss Franc will also be at risk of appreciating but won't be interested in the safe haven flow given their respective central bank policies of wanting to see their own currencies weaker.

STRONG BY DEFAULT - Of course, we live in a world now where the US administration and even Federal Reserve aren't really interested in seeing a strong US Dollar. This makes it even more interesting as the EU won't be too excited about absorbing all of the inflow and appreciation via the Euro. Basically, no one out there wants a strong currency, as everyone is looking to build up their export economies. On net, this does leave the US Dollar in the best position to appreciate despite the US administration or Fed interests. The US economy is still the largest and most sophisticated economy in the world and is still the safest place to put your money if things get dicey. And yet, this leaves room for another currency to appreciate as well. 

GOLDEN ASSET - We must not forget that GOLD is a currency and will probably be the biggest beneficiary in a risk off scenario where everyone is trying to weaken their currency and global inflation's next big move is up. The yellow metal has been chopping around for quite some time, but is slowly gaining momentum and could be on the verge of a major breakout that pushes it well above the 2016 high at 1375. Well above! But getting back to where we started, I do find it perplexing to see a day where the US Dollar is in heavy demand and US stocks are also up. 

Why it doesn't make sense to see the US Dollar and US stocks up at the same time. Via @joelkruger

MAKING SENSE - Any US Dollar demand should be risk off right now. Why? Either the US Dollar is bid up on strong economic data and a more aggressive Fed policy reversal trajectory, which is bad for stocks because policy reversal makes valuations less attractive, or the US Dollar is bid up because there is tension around the globe and the market is looking for a safe haven option, which of course would be a bearish development for stocks. So looking back at the Monday movement, I am left scratching my head and am far from convinced that we should see this correlation of higher stocks and higher Dollar last for anything more than a fleeting moment. In my view, it makes more sense to see higher USD and lower stocks right now. 


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