What the US Dollar Equities Correlation Is Telling Us

By Andrew Nyquist  AUG 12, 2013 3:15 PM

Many analysts believe that a weakening dollar is good for equities. But it isn't quite that simple.

 


As most market participants are aware, there has been a strong correlation between the US dollar and US equities over the past 30 years. As many analysts have said before, “a weakening dollar is good for equities.”  However, I would argue that the US dollar equities correlation isn’t quite that simple.
 
With globalization and an ever-changing political and financial landscape, the capital markets have been in transition. And this has assisted in putting US equities (and the US dollar to some extent) back in the capital market driver’s seat. While equities have climbed to new all-time highs, the US dollar has moderated, prompting many to start focusing on a bottoming formation. Could this be the start of a new cyclical theme? Or even secular? Could we see a final stage that includes strong equities and a strong dollar?  Again, food for thought, but with the sovereign debt crisis manifesting behind the scenes, and many developed countries beginning to “print,” the US dollar may indeed be the tallest midget. And for these reasons, capital has been (and may continue) flowing to US denominated assets.
 
Now, let me set something straight, this post has zero to do with market timing, so no need to remind me that the equity markets are elevated and a correction could occur at any time. Again, that’s not the point of this piece. Yes, I’m a trader. But I’m also a passionate follower of markets, and this is a macro theme that should be considered.
 
Finally, let’s turn to the 30-year chart of the US dollar equities correlation ratio (see below).  As mentioned previously, the correlation has been strong. At present, the correlation ratio is resting near 2007 highs. But we haven’t seen the type of ratio expansion that is apparent with the moves in 1987 and 1998 (and possibly not as strong as 2007). So maybe this move is more orderly than many think. We shall see.
 
US Dollar Equities Correlation 1981 to Present
 



Editor's Note: Andrew Nyquist is an independent investor based in the Minneapolis area. This article originally appeared on his investing and economics site, See It Market.

Twitter: @andrewnyquist
No positions in stocks mentioned.

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