Bespoke Investment Group

Will The Dollar Continue To Rally?

The US Dollar index has made a nice move higher since the end of November with a gain of about 5%.  The important part about this rally is that the index has broken the long-term downtrend that it had been in since early 2009.  As shown below, the recent action in the Dollar looks a lot like the start of the rally that occurred in the second half of 2008.  In late July/early August of last year, the Dollar gained a quick 5% out of the gate when it broke a multi-year downtrend.  The currency went on to gain 25% over the next 7 months.  Will the recent break of the downtrend be the start of a similar rally?

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US Dollar Index Breaks Downtrend

Since its close on November 25th, the US Dollar Index is up 3.09%.  This is a pretty big move in the currency market, and it has been an important move because it has broken the long-term downtrend that the Dollar has been in over the last six months.  As shown in the chart below, prior rallies over the last six months have been short lived.  Anytime the index bumped up against the top of its downtrend channel, it quickly reversed and headed lower.  This time around, however, the Dollar was able to break through the top of its downtrend channel, and this resistance will now act as support.

Here at Bespoke we constantly monitor the Dollar's impact on stocks.  We've highlighted numerous times how companies that generate the bulk of their revenues outside of the US (which benefit from a declining Dollar) have outperformed companies that generate all of their revenues domestically as the Dollar has declined.  Our database that shows the geographic breakdown of revenues for all Russell 1,000 stocks is one of the more popular products in our Bespoke Premium package.  If the Dollar continues to rally, we should see a shift in outperformance from the "international revenue" companies to the "domestic revenue" companies.  Subscribe to Bespoke Premium today to access our International Revenue database.

Dollar Back Above 50-DMA For the First Time Since April

The US Dollar Index is rallying once again today and is now poised to close above its 50-day average (DMA) for the second straight day.  To put the greenback's recent malaise into perspective, you have to go all the way back to April to find the last time the index closed above its 50-DMA for two days in a row.  Back then, the streak only lasted two days as well!

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Stock Market Returns Lost in Translation

One of the side effects of a weaker dollar is that the returns for foreign investors who invest in US assets are diminished.  While the value of the asset may rise in dollar terms, if the dollar is losing value, the investor takes a hit when they convert their funds back into their domestic currency.  For example, while the S&P 500 has risen 20.2% so far this year in US dollars, investors outside of the US have generally seen much less impressive returns.  In the table below, we looked at the YTD returns of the S&P 500 for investors in various currencies.  Of the currencies we looked at, the only one that has seen a benefit from the currency translation is the Argentinian Peso.  Returns have been diminished once fluctuations are taken into account for all other currencies.  And of course some countries have been affected more than others.  So far this year, Brazilian investors who bought the S&P 500 at the end of last year have lost nearly 12 reals for every 100 they invested on January 1st.

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Dollar Settles Down

While the decline in stock market volatility this year has been well documented, the decline in currency volatility has gotten less attention.  The decline in the dollar's volatility, however, has been nearly as dramatic as the decline in equity volatility.  The chart below shows the average daily percentage change (up or down) of the US Dollar Index over a rolling 50-day period.  Back in December of last year, the Dollar was averaging a daily gain or loss of 0.92%.  Since then, the average daily change has more than halved to 0.43%, although it is still higher than the 0.30% average since 1973.  Unlike most other assets where volatility decreases as prices rise, in the currency market, lower volatility has coincided with declining values.

 

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Dollar and Stocks Still Moving in Opposite Directions

The red line in the chart below is not an inverse of the S&P 500.  It's actually an intraday chart of the dollar.  No sooner than one goes up, the other goes down.

  

Currency ETFs

Below we provide a snapshot of various currency ETFs along with their recent performance.  The US Dollar's weakness has been pretty much every other currency's gain, with some obviously doing much better than others.  As shown below, the Australian Dollar ETF (FXA) is up the most year to date with a whopping gain of 24.81%.  The G10 currency strategy ETF (DBV) is up the second most at 19.36%, followed by the Canadian Dollar (FXC), the Swedish Krona (FXS), and the British Pound (FXB).  The British Pound ETF (FXB) and the US Dollar ETF (UUP) are the only two that are down over the last 5 days, and they are both below their 50-day moving averages along with the Mexican Peso ETF (FXM).

 

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Dollar (Yin) vs. Stocks (Yang)

In response to last week's post on the inverse relationship between the dollar and stocks, some readers asked how the relationship between the two assets has played out on a longer term scale.  The chart below highlights the performance of the S&P 500 and the US Dollar Index since 2003.  In this chart, the dollar is not plotted on an inverse scale.  As shown, the two charts have consistently been moving in opposite directions.  As long as this trend continues, what's good for the dollar is bad for stocks.

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Currency ETFs Shine As Dollar Falls

As the Dollar has fallen, currency ETFs have been in rally mode and are now trading at their highest levels in months.  As shown below, many currency ETFs have risen sharply in the past couple of weeks and are trading well above their 50- and 200-day moving averages.  On a percentage basis, the ETFs haven't done as well as stocks, but relative to their historical moves, their performance has been extremely positive. 

The Australian Dollar ETF (FXA) has gone from $65 to $85 since March.  The Euro ETF (FXE) has gone from $130 to $145, the Swedish Krona ETF (FXS) has moved from $115 to $140, and the Franc and Yen ETFs (FXF and FXY) have each risen about $10.  Will these uptrends continue, or are we due to see a reversal with these currencies moving lower versus the dollar?

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US Dollar Index Testing 50-Day Average

Calling it a rally would be an exaggeration, but the US dollar index has seen a modest gain over the last several days and is currently trying to break above its 50-day moving average (DMA).  Over the last six months, the 50-DMA has been acting as a steamroller for the index, rolling it over with every attempt at a rally.  Given the fact that the negative correlation between the dollar and stocks is at historical extremes, a failure of the dollar to break above its 50-DMA would be a plus for stock market bulls.

 

The Dollar and US Stocks

If it seems like the S&P 500 and the Dollar move in the opposite direction of each other on a daily basis, it's because they pretty much do.  In fact, since daily pricing of the US Dollar begins in 1970, the six month correlation between the daily change of the two is at its most negative level ever.  The next most negative level of correlation between US stocks and the dollar came in 1982.  We can only hope, however, that our stocks and currency can perform like they did in the years following 1982.

 

Gold Breaks Downtrend And Dollar Breaks Down

Gold is up another $12.40 today to $939/ounce.  Ever since the metal hit support at its 200-day moving average in April, gold has been rallying nicely.  And based on technicals, gold has quite a bit of room to run on the upside before it starts to hit resistance again.  As shown below, when the metal broke its multi-month downtrend at the start of May, it turned the technicals from negative to positive. 

Gold's gain has coincided with the Dollar's demise.  The Dollar tried to mount a comeback after taking a big hit in March, but it didn't get close to a retest of its 52-week highs.  Once it tested and failed at support levels a couple of weeks ago, the trend turned from neutral to negative.  The next area of support for the Dollar doesn't come into play until it gets down to its December lows.  For now, investors should play the stocks with high international revenues as a play on the decreasing dollar. 

To find out which US stocks get the most revenues outside of the US, yearly subscribers to Bespoke Premium can access our International Revenues Database.

 

 

Dollar Revaluation

While the Fed's announcement on 3/18 that they would buy long-term US Treasuries was, for all intents and purposes, a devaluation of the dollar, the market seems to want no part of it.  After an initial two-day selloff, the US Dollar Index has already regained 80% of the decline.

 

US Dollar Has 3rd Biggest One-Day Decline Ever

The US Dollar index had its third biggest one-day decline today since daily pricing begins back in 1970.  After the Fed announced that they will be purchasing US Treasuries and other assets, the Dollar fell sharply and ended the day down 2.69%.  As shown in the one-year chart below, the US Dollar index broke below its 50-day moving average today after breaking below its short-term uptrend a few days ago.  The Dollar is still trading above its longer-term uptrend, but the technical damage done in recent days is not a good sign.

Below we highlight all one-day declines of 2% or more for the US Dollar index, along with the percent change on the following day and over the following week.  As shown, the average return over the next day and week has been -0.18% following these big down days in the past.

   

US Dollar at Multi-Year High

Trillion dollar bailouts, trillion dollar deficits, and the largest spending bill in US history.  These days, one would think that with all this spending, the US Dollar would be as popular as a Wall Street CEO.  However, this morning, the US Dollar index hit its highest level since April 2006 even as news of another bailout for AIG hit the tapes.  But when you're competing against the likes of Europe, the dollar suddenly doesn't look so bad.  In a similar comparison, normally Lloyd Blankfein and Jamie Dimon would be worried about their jobs after GS and JPM have both declined by roughly 60%.  But when your competition is Jimmy Cayne, Stan O'Neal, John Thain, Dick Fuld, etc... they look like superstars.

 

Longer term, however, the US Dollar Index remains well off its highs of this decade, or even the last six years.  As shown below, as recently as 2003, the index traded above 100, which is about 12.5% above current levels.

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The Curious Case of the US Dollar

As equity markets test their November lows, the US Dollar index is testing its November highs.  The US Dollar has been a peculiar "risk-flight" trade throughout the credit crisis, as global investors have flocked to the currency with the belief that other sovereign nations are even worse off than the US.  This comes at a time when gold is also rallying to new highs, and the US money supply is increasing at an astounding rate.

 

Currency ETF Charts

We haven't checked in on the currency markets lately, so below we highlight price charts for a number of currency ETFs.  The only currency that has been in a continous downtrend over the past 6 months is Mexico's Peso (FXM), and who knows when this downtrend will end.  The Australian Dollar (FXA) and Canadian Dollar (FXC) have both been able to remain above their November lows over the past few months, forming a U-shaped bottom. 

The British Pound (FXB) was in the same boat as the Peso until it recently broke above its 50-day moving average to give it life again.  But it quickly pulled back below its 50-day, so the jury is still out on whether or not a bottom has been made.  

After suffering a severe pullback following its multi-month rally, the US Dollar has found its footing again, but it has struggled to test its '08 highs recently and has been trading sideways.  This sideways trading is paving the way for a big move once it finally breaks in one direction. 

And finally, the Japanese Yen (FXY) has been trading in a long-term uptrend until it recently broke below its 50-day.  This sure looks like a sign that the Yen could be in store for a protracted pullback, at least based on technicals. 

 

 

 

 

 

 

 

British Pound Crumbles

The US Dollar is clearly back in rally mode after suffering a setback in December.  As shown in the first chart below, the Dollar index has now broken well above its 50-day moving average and appears to be heading back to its November highs.  Unfortunately, rallies in the Dollar have recently coincided with declines in riskier assets like equities.

 

But the bigger news in currencies is the dramatic fall that the British Pound has recently experienced.  Today the Pound is suffering another big drop, and as shown in the first chart below, the currency broke below recent support levels as well as the $1.40 mark.  And the bottom chart shows just how much the Pound has fallen in such a short period of time.  In late 2007, the Pound was trading at record highs versus the US Dollar.  Now it is trading very close to its lowest level since 1991.  Anyone in the US that has the money to go to England can stay there on the cheapest tab in decades.

 

 

US Dollar Testing Resistance

The US Dollar index has made a nice comeback after its free-fall from late November to mid December.  The Dollar is up 6.76% from its low on December 17th, but as shown in the chart below, it is bumping up against key resistance at its 50-day moving average.  If the Dollar is able to break above its 50-day, a resumption of its multi-month uptrend will be solidified.  If it fails to break through, however, the current level will be one peak of a newly formed downtrend.

 

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Euro Runs into Textbook Technical Resistance

After rallying nearly 12% in a little more than a week, the Euro was stopped dead in its tracks yesterday, and has since corrected by more than 5%.  While the main explanation for the Euro's two-day decline is that the ECB said it would enact measures to spur more lending between banks, a look at the chart below shows that the currency ran into key resistance right at its 200-day moving average.  While technical analysis is often criticized as a method for 'lazy' traders who don't want to do in-depth research, charts like this show that even if you are a strict fundamental investor, you should always be aware of the major trends other traders are following. 

 

Biggest 6-Day Decline For The Dollar Ever

The US Dollar index fell another 2.2% today for its biggest 6-day decline ever.  As shown in the table below, the current 6-day decline of 8.07% tops the prior record decline of -7.48% set back in September of 1985.  If it's not one asset falling these days, there's sure to be another.

 

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Dollar/Oil Reversal

From a technical perspective, the US Dollar index is not looking good, while oil has just broken above one of its downtrend lines.  While the Dollar hasn't broken its uptrend from its July lows yet, it's getting very close, and the action of the currency over the next couple of days should provide insight into how it will trade over the next few months.  If it can hold support, it will remain in bull market mode, but if it breaks its uptrend line, look out below.  Oil, on the other hand, finally looks to have at least stabilized from its epic freefall since its July highs.  While it has a long, long way to go before putting a dent in its losses, its recent break above its short-term downtrend line is a start.

 

 

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The Dollar Gets Slammed

While investors have been focused on the S&P 500 and its attempt to break through its 50-day moving average, the Dollar had no problems breaking through its 50-day.  Unfortunately, the break was to the downside.  With a decline of 1.5% today, the US Dollar index traded below its 50-day moving average for the first time since late July.  At the same time the Dollar has been falling, the Euro has been rallying, as it broke above its 50-day moving average for the first time in months.  Was the negative yield on the three month T-Bill a wake up call to foreign investors that holding cash in Dollars is not a very attractive option?

 

Not surprisingly, Gold is benefiting from the Dollar's weakness with a gain of 3% today.  A look at this chart shows that the commodity is still nowhere near breaking its downtrend.  However, it is currently trading right at a short-term resistance level of around $830.  How it acts in the weeks and months ahead will be a good indication of how concerned the market is regarding inflation.

 

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US Dollar Index Has 5th Biggest Decline Ever

As equity markets stage their second straight day of gains, the US Dollar index is having its worst day since 1985, and its 5th worst day ever (since 1970).  And today's fall for the Dollar broke the uptrend the currency had been in over the last couple of months, although it is still in a longer-term uptrend off of its Spring lows.

Falls in the Dollar are coinciding with gains in equity markets and economic stability worldwide, since the US currency is now being treated as a safe haven.  Go figure.

 

US Dollar: A Nice Move, But A Long Way To Go

The US Dollar index is now up 16.5% since it bottomed earlier this year, which is a significant rally for a currency that many had begun to jokingly call the US Peso.  The Dollar is currently in a very nice short-term uptrend, trading 5.5% above its 50-day moving average and 11% above its 200-day.  However, it's important to remember that the currency has a long, long way to go to get back to levels seen in the earlier part of this decade.  As shown in the chart below, we need about 5 times the rally we've seen over the past couple of months to get back to 2000 levels.  But the Dollar has historically had very long bull and bear market cycles, and once it gets going in one direction, it usually stays on track for quite some time.

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