Is the DXY deviating from usual correlations???

Discussion in 'Trading' started by NERVESASTEEL, Aug 9, 2010.

  1. Does anyone have an opinion of why the below relationships seem to be deviating from their norm?
  2. Have you considered the possibility that the correlations you saw previously were spurious or, better yet, non-existent?
  3. I'm considering that today. This may simply be a 2 day anomaly, but typically the dollar does move similarly to the VIX and contrary to the indexes.

    When one of the gears in my model begins to breakdown, I need to open the hood and find out "why"?
  4. To stay with your aptly chosen terminology, I think it pays to keep the hood open at all times, so to speak. That's what I try to do, anyways, to the best of my ability.
  5. piezoe


    Nerves, I follow this myself. Not the dollar index but the dollar futures and not SPY but SPX or in my case ES. So same thing really. It is not all that unusual for the dollar to get decoupled so to speak from the broad market for various periods of time. It is true that the dollar and the market tend to move in opposite directions and often for periods during the day they can appear to be joined at the hip as reciprocals of each other.

    My thinking is that a reciprocal relationship is the normal one and over longer periods of time a falling dollar should correspond to a rising market. This is consistent with what one sees in long term charts of the S&P. And when these same charts are expressed in constant dollars it becomes clear that over the long haul dividends and inflation are the major drivers of stock prices, and not earnings as might be thought, however one has to consider that dollar weakness can improve earnings for companies doing business abroad where earnings are in a stronger currency. When those earnings get converted to dollars on the balance sheet they look pretty good. But of course it is largely an illusion.

    Now back to the dollar and the S&P futures. You have probably noticed that the dollar has been in a constant slide since early June. In fact it has really been in a slide ever since the financial crisis in 2008 and the Fed's announcing of "quantitative easing." However it is going down in a very wide channel overall since 2008 so there have been periods when it is rising, but since 2008, always with a lower high.

    I note that most recently since June of 2010 the dollar has been in a narrower channel and definitely down. On the other hand the market appears over the same period to be range bound. We are now trading close to where we were in late June.

    From a technical standpoint, the dollar is clearly at support, and the very important Euro/USD is coming into overhead resistance at the same time. Also consistent with this picture is the USD/JPY which is also at support and traders are expecting the USD/JPY not to trade much lower than 85 for now.

    What does this mean for SPX, SPY and ES? I really don't know, and I'd be rich if I did, but it has occurred to me that the Fed is to make an announcement tomorrow and there are some renewed calls for further goosing of the economy. One rumor is that the Fed will buy more long bonds and of course that gives the Treasury more dollars to spend and those will eventually wend their way deeper into the economy. The popular media talk seems to be coming down on the side of extra gloomy (a bullish factor as I see it). And importantly we have a national election coming up in November . My thinking is that all of these factors are aligned to favor a bullish outlook for the Fall up until the election. This I would think would be especially likely to transpire if the dollar should breakdown below support, and possibly Fed or Treasury action will be the catalyst that causes that to happen. So at this point I'm just waiting and watching, but I would not be at all surprised to see a Fall rally even though it might seem counterintuitive in such a gloomy economic climate.

    Eventually the market must respond to a weaker dollar -- it really has little other choice, unless of course the economy becomes totally unraveled, and then who knows what might happen..
  6. Wow, I am right with you piezoe. Great analysis!

    Indeed I’m playing close attention to the Euro/USD & USD/JPY support/resistance levels and am aware of the QE2 rumors. Tomorrow is huge … although I thought the same thing last week with the GDP and Jobs report. Waiting and watching for the market to pick a direction is definitely the best strategy; annoying but the only discipline choice.

    However my concern is that the dollar action Fri./Mon. may be a leading indicator pointing to a bounce in the USD, possibly followed by a market sell off. Copper has also weakened, possibly confirming that the USD has held support.

    If indeed the rumor of QE2 is true, or the Fed hints at such a policy change, the dollar will undoubtedly take another leg down. But it’s been my experience that the Fed makes such policy moves over the weekend following a substantial sell-off. This of course causes the shorts to cover in spectacular fashion, leading to a short term change in market direction.

    We’ll see. The market seems poised to go higher and, unlike the media, the trading community seems ready to run the SPX thru 1131 to 1150. Recent price action also seems to support a move up … but my model is stuttering here.

    Anyway, thanks again for your insight!
  7. piezoe


    Thanks for the kind words, a rarity on ET. It would be rather bizarre for the dollar to just go crashing through support, so whether support holds or not I would anticipate some bouncing and sideways movement likely accompanied by increased volatility in the markets, as is common at points of high uncertainty. I guess yesterdays lackluster market was just an indication that we are all waiting on the Fed. Maybe we will see some fireworks this pm.