Dollar Correlation With Equities Waning. By Nicholas Hastings
Strong equities are no longer translating into a weaker dollar.
In fact, as a stronger-than-expected second-quarter earnings season draws to a close, global risk appetite appears anemic and the prospects for the U.S. currency have probably improved.
The reasons for this breakdown in a once strong correlation between currency and equity markets are still unclear.
Either investor confidence in those earnings are weak or expectations for a global recovery remain too uncertain. Whichever way you look at it, investors still aren't prepared to stick their neck into high-risk asset markets at this stage.
Sue Trinh, senior currency strategist with RBC Capital Markets in Sydney, pointed to the dollar's overall strength in recent weeks. She said she reckons that if its trade-weighted index, which is now just under 79.0, can break through trendline resistance at 79.10, "we may be in for an extended dollar rally in the short term."
For the most part, second-quarter earnings have proved much stronger than the market anticipated - driving the Dow Jones Industrial Average over 9,000 for the first time since January and lifting most global stocks.
But much of the profits are seen as unsustainable in the long run and reports such as the 29% decline in Microsoft's profits appeared to have struck a chord in the investment community, which is still looking for hard evidence of economic recovery.
Evidence of the recovery has also been difficult to find in the string of economic data that has come out in the last week or two. Sure, some figures have been positive. The U.S. housing market has been showing signs of a bounce and business confidence and industrial activity in Europe appear to have improved. But with other data showing things like the U.K. economy contracting by more than double what the market expected in the second quarter, investor confidence in the global economy remains fragile.
So while equity markets might still forge ahead, a wider move into risky markets certainly isn't being reflected in currencies.
Take the euro - a currency that normally rises in line with equities as investors move out of the safe havens.
This time round, the single currency made only a feeble attempt to break upward through resistance at $1.43 and has slipped back sharply since then, suggesting that long positions are getting too heavy and that the dollar's upside potential against it are growing.
Click Image to Enlarge
Early Monday, the dollar was mostly lower, waiting to see if there are any comments from China about its reserve diversification plans as high level talks with the U.S. get underway later in the day.
The euro was mostly higher, helped by a rise in equities, with the Nikkei gaining 1.5% after the Dow Jones Industrial Average ended 0.3% higher. Risk appetite could get support later in the day if new U.S. home sales also show the 2.3% rise that is being forecast for last month. This compares with a 0.6% fall in May.
By 0645 GMT, the euro had risen to $1.4264 from $1.4212 late Friday in New York, according to EBS. The single currency was also up at Y135.26 from Y134.53, while the dollar rose to Y94.80 from Y94.69.
In fact, as a stronger-than-expected second-quarter earnings season draws to a close, global risk appetite appears anemic and the prospects for the U.S. currency have probably improved.
The reasons for this breakdown in a once strong correlation between currency and equity markets are still unclear.
Either investor confidence in those earnings are weak or expectations for a global recovery remain too uncertain. Whichever way you look at it, investors still aren't prepared to stick their neck into high-risk asset markets at this stage.
Sue Trinh, senior currency strategist with RBC Capital Markets in Sydney, pointed to the dollar's overall strength in recent weeks. She said she reckons that if its trade-weighted index, which is now just under 79.0, can break through trendline resistance at 79.10, "we may be in for an extended dollar rally in the short term."
For the most part, second-quarter earnings have proved much stronger than the market anticipated - driving the Dow Jones Industrial Average over 9,000 for the first time since January and lifting most global stocks.
But much of the profits are seen as unsustainable in the long run and reports such as the 29% decline in Microsoft's profits appeared to have struck a chord in the investment community, which is still looking for hard evidence of economic recovery.
Evidence of the recovery has also been difficult to find in the string of economic data that has come out in the last week or two. Sure, some figures have been positive. The U.S. housing market has been showing signs of a bounce and business confidence and industrial activity in Europe appear to have improved. But with other data showing things like the U.K. economy contracting by more than double what the market expected in the second quarter, investor confidence in the global economy remains fragile.
So while equity markets might still forge ahead, a wider move into risky markets certainly isn't being reflected in currencies.
Take the euro - a currency that normally rises in line with equities as investors move out of the safe havens.
This time round, the single currency made only a feeble attempt to break upward through resistance at $1.43 and has slipped back sharply since then, suggesting that long positions are getting too heavy and that the dollar's upside potential against it are growing.
Click Image to Enlarge
Early Monday, the dollar was mostly lower, waiting to see if there are any comments from China about its reserve diversification plans as high level talks with the U.S. get underway later in the day.
The euro was mostly higher, helped by a rise in equities, with the Nikkei gaining 1.5% after the Dow Jones Industrial Average ended 0.3% higher. Risk appetite could get support later in the day if new U.S. home sales also show the 2.3% rise that is being forecast for last month. This compares with a 0.6% fall in May.
By 0645 GMT, the euro had risen to $1.4264 from $1.4212 late Friday in New York, according to EBS. The single currency was also up at Y135.26 from Y134.53, while the dollar rose to Y94.80 from Y94.69.
- 27 July |
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