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Currencies weigh upon the S&P 500® Index

09/09/2011

Since March 2009, one constant throughout the recovery in the S&P 500 Index has been the secular downtrend in the U.S. Dollar Index (Figs 1.1 and 1.2).
 
A cheap U.S. dollar has been the catalyst for rising exports (Fig 1.3), which reached a record $178 billion in July. Multinational corporations can continue to offer their cheaper capital goods to the world, bolstering earnings.
 
In addition, the historically easy monetary conditions here in the U.S have contributed to the secular downtrend in the U.S. dollar. However, in recent days the U.S. Dollar Index and its counter currency, the euro, have reversed some of the long-standing momentum (Figs 1.4 and 1.5).
 
This is clearly a technical move, however, it was precipitated by weakness in recent German economic figures. As goes Germany, so goes the direction of the eurocurrency. The German economy has been resilient throughout the euro debt crisis, until now. Subsequently, long-standing bullish positions in the eurocurrency are currently being liquidated.
 
The shift in momentum in these two major currencies is impacting the S&P 500 Index. Take a look at the price action in the S&P 500 Index since the euro broke below its 200-day moving average (Fig 1.6) and the U.S. dollar broke above its 200-day moving average (Fig 1.7) – in the case of the U.S. dollar, for the first time since mid-September 2010. Those technical moves have reversed the recovery attempt in the S&P 500 Index since August 31 (Fig 1.8).  
 
As long as further U.S. dollar strengthening is evident, the S&P 500 Index will be challenged.  Watching how the U.S. dollar and euro trade in the coming weeks is extremely important to determining the direction of the S&P 500 Index. I continue to remain more concerned about the next three weeks rather than the next three months.
 
 
Fig 1.1 U.S. Dollar Index since 9/30/08

Source: Bloomberg
 
Fig 1.2  S&P 500 Index since 9/30/08

Source: Bloomberg
 
Fig 1.3 U.S. Exports since 9/30/01

Source: Bloomberg
 
Fig 1.4  U.S. Dollar Index since 8/12/10

Source: Bloomberg
 
Fig 1.5  Eurocurrency since 8/12/10

Source: Bloomberg
 
Fig 1.6  Eurocurrency since 8/31/11

Source: Bloomberg
 
Fig 1.7  U.S. Dollar Index since 8/31/11

Source: Bloomberg
 
Fig 1.8  S&P 500 Index since 8/31/11

Source: Bloomberg

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