How the Dollar's Rise Has Been Killing Equities and Commodities
Now is a good time to start paying closer attention to the greenback.
Over the past month, the dollar has stealthily pushed higher into important resistance, flooring commodities, hitting equities, and adding a strong whiff of deflation to the air. This is nothing new, of course. The inverse correlation of the dollar to equities over recent times has been roundly noted. Take, for example, the performance of precious metals, oil, etc., over the past three to six months. Technically speaking, there isn't a lot of resistance above 82. And further, a breakout would point to the 88-90 area (see annotated charts below).
On the flip side, one day does not a breakout make. A quick move back under 82 would leave the dollar in "undecided" land.
So the question remains: Is this recent poke through resistance a warning to commodities and equities that there is more dollar upside to come? Well, equity/commodity bulls are quietly hoping that this is an overreaction to Europe -- or a head fake of sorts. And most would feel justified arguing that the slowing domestic economy will need more quantitative easing, and this is bearish for the dollar.
But there is that pesky situation in Europe. And further, recent hints at pro-growth initiatives in Europe have helped to stunt recent commodity (and deflationary fears). So, what happens if Europe ultimately capitulates and starts its own printing presses, effectively throwing its hat into the global currency devaluation race? Currency wars, anyone?
There are a lot of moving parts, that's for sure. But until the dollar decouples from its inverse relationship with equities/commodities, I'll be watching closely.
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.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter