Has the Dollar Bottomed?

Relative momentum has shifted back towards US stocks (SPY ETF) versus the rest of the world (using the IOO ETF).

Relative momentum shows where global capital flows are…flowing.

And global capital flows are what drives currency valuations.

In the chart below, notice how when SPY is stronger than IOO (black line), DXY, which is the dollar index (red line), is typically, also stronger.

Currently, there is a divergence.

While SPY vs IOO has been rising for past couple months, the dollar has been falling.

This gap has to close at some point.

In the chart below, European stocks (EZY ETF) versus US stocks (SPY ETF) has been weakening.

But EUR/USD is not.

This gap has to close at some point.

Either European stocks will regain strength vs. US stocks or EUR/USD weakens.

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The Fed and central banks around the globe are doing their best to suppress the dollar which is an artificial way to keep global interest rates lower.

A weak dollar for foreign borrowers keeps rates artificially low.

Assuming the Fed maintains its quantitative tightening (QT), I am bullish on the dollar. I’m looking for it to breakout to the upside.

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What about USD/JPY vs. US and Japanese equities?

USD/JPY is a little bit tricker.

As you can see from the chart below, starting in 2015, US equities and USD/JPY have an erratic relationship.

Here’s another chart showing ETF flows. Money has been flowing out of European equity ETFs for the past few weeks which is a big shift from the positive inflows earlier this year.

This could hint at changing sentiment for Europe and the euro.

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The dollar rally finally seems to be underway.

Speculative accounts from COT data still maintain YUGE net short dollar positions. More short-covering is likely.

I think we may see some correction on the USD/JPY beforfe the rally continues.

Excellent rally on the Dollar. The Dollar index rallies during this Wednesday’s session after the FED minutes were published. The index was stuck around the 95.00 level with a good support at the 55 day EMA at the 94.71 level. If the index continues rallying, then the 96.00 level may act as resistance. Above the 96.00 level, the 97.00 level may also act as resistance. Below the 94.71 level, the 200 day EMA around the 93.75 level may act as support.

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