June 08

U.S. Dollar and Stocks on the Edge

The S&P 500 index is approaching some very key levels of support today between 2080 and 2070. The 100 Day moving average is at 2084. The middle Bollinger band on weekly charts lies at 2072, this level has only been violated five times since 2009 and a mild correction ensued each time. A bevy of trendlines have been broken over the last three trading sessions, and the shape of the chart implies that a quick breakdown from current levels would show a very clear and obvious breakout pattern. Today’s weakness in technology shares implies that worries may be concentrated around stocks with high valuations, this is not the same type of  selling seen recently in dividend stocks(related to rising yields).

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US stocks have been the strongest developed world equity markets in recent months as European indices have dropped on rising German bund yields. American assets no longer sport the support of the Federal Reserve which is now widely expected to hike rates in September.  As economists, Wall Street banks and various market pundits coalesce around September being the liftoff month, it is hard to see how the SPX and USD will continue their climb from here as they both face a plethora of risks from Greece, crowded positioning and now widespread liquidity worries.

The US Dollar was not able to hold its ground on a Monday after a very strong non farm payrolls report, which tells us the trade may just be too crowded to continue for now. Given the consensus about September rate hikes, any break down in the US equity market will be seen as a cause for delaying rate hikes and selling the Dollar. In recent months FX has become a secondary reaction to other markets as the 10 year bund yield smacked around EURUSD, and every other Dollar pair became a derivative of EURUSD even though the catalysts were only coming from the Euro side of the pair.

Given ongoing valuation concerns about US stocks and liquidity worries about high yield credit, a crack in these assets would be the catalyst needed to finally take out the Dollar rally as it has already become a very crowded and consensus trade for over a year now. Yen shorts have exploded from nearly flat to almost 100k in just a few weeks, and any sign of pain in US equity markets or a Greek default will set off the classic Japanese repatriation flows. USDJPY looks to be the most vulnerable to an unexpected and rapid correction. Fundamentals are no longer steering FX in this new world of illiquid markets, it’s all about positioning and the flavor of the month. Last month it was Bunds driving all financial markets, and now it seems like it’s time for the S&P 500 to take the wheel.

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