Thursday, December 17, 2009

Stocks and the U.S. Dollar: A Shifting Relationship



Note the close correlation of the two charts (ES futures, top; euro vs USD, bottom) over the first three-quarters of the period since September. During December, however, the relationship has fallen apart, as we've seen a dramatic correction in the euro, while stocks have held within their multi-week range. Investors are banking on a growing U.S. economy, but they are not banking on significant inflation or on an imminent hike in interest rates. That is creating a sweet spot, where both stocks and USD benefit from favorable economic news.
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2 comments:

OKL said...

Keeping a close eye here; its very odd that a movement in the USD of this magnitude (price movement over time; EUR dropped ~0.08 from 1.514 to 1.433 within 12 trading days) to not be reflected w/significance in other markets simultaneously...

But you mentioned "sweet spot" and I wonder if 3.33% < TNX < 3.8% is it...

Curiously, this is eerily similar in a certain sense to 2008, when the USD popped ~1.6% on 08/08/08 and the next 4 mths proceeded to be pretty crappy.

And if one views Greece/Dubai/Austria as "sub-prime" (strange how the rhetoric from the ECB sounds the same as Bernanke back in 2008), then maybe the worst is yet to come... maybe the stock market hasn't learnt its lessons yet?

Looking at the overnight market action, looks like things could get a bit dicey ahead of expiration.

zircon-212 said...

F/X liquidity dries up significantly this time of year. Honor your stops as the crowded trade position holders potentially try to exit at the same time.