US dollar: on the fence and looking downward
Whenever I experience rough times in my trading I assume one or even more reasons for that. The correction may be delayed, the trend has taken on different direction, or, perhaps I’m just plainly wrong. Either way it makes me think – what happened and why. Since I’m a “swing trader” who act upon trends, any prolonged period of loss creates doubts about my projections. So, what do I see when looking for trends now?
Well, there’s one thing that definitely has caught my attention, the US dollar. The dollar has always been cyclical, having a huge impact on the markets. And now it seems has reached its peak once again.
What makes me think that way? Well, whenever the US dollar is rising, investments in US economy seems very attractive, especially for foreign investors. The value of assets is growing along with the currency. On the other hand, when the opposite trend emerges any investor has to think harder about the available options. Emerging markets have difficult times when dollar goes up. The correlation about these two is obvious in my opinion.
For example, look at the dollar index and the MSCi Emerging markets index. Whenever the US dollar is getting stronger, the emerging markets are getting weaker, and vice versa.
The strong impact of the dollar is equally pronounced in commodities. Look at the commodity index and the dollar. For commodities I usually use the Bloomberg commodities index.
As you can see, the impact of the US dollar on the markets is huge. And once you learn about the dollar effect and spot patterns in its cycle, you can use it to your advantage.
I think that under these circumstances the trend will change. Look at the US as a foreign investor: the stock markets are at their peak and their future outlook and earnings are uncertain (see my previous blog post), the unemployment rate is way up, and the confidence in the solvency of many substantial for economy companies is not that great either. So, the forecasts are not that great. Besides, the value of the US dollar has risen over the past 10 years…
Investing in corporate bonds does not seem interesting and even safe either. Besides, the interest rates are low.
Investments in bonds until now were justified by the dollar’s strength, even at low yields. However, I think it is not worth it to invest in bonds now since I’m not sure that the US dollar will continue to strengthen.
No wonder that this situation increases feeling “to get money home”, to have it accessible within reach and wait for more predictable times. Perhaps US dollar circle is ripe enough for it’s move downwards at this very moment. If it’s that so, keep in mind that prices for commodities are very attractive now.