Mixed FX Markets Support Higher Stock Prices

From the Desk of Ian Culley @IanCulley

Stocks only go up.

Bitcoin is screaming its way back to the former all-time highs. Crude is printing multi-month highs. Even gold is breaking out to new all-time highs after going nowhere for years.

We’re entering the Davey Day Trader part of the cycle — green hammer and all.

Everything is trending higher. Everything except the dollar, that is…

The US Dollar Index $DXY is trading smack dab in the middle of last year’s October-to-December decline:

DXY rebounded to start the year only to find resistance at a critical retracement level.

It’s your standard trendless mess offering little insight into the dollar's next move.

While the bearish momentum regime favors the bears, momentum alone falls short of solidifying a bearish outlook.

I can’t help but see a smiley face outlining the past fourteen months on the DXY chart:

Will it turn into a bullish reversal? It’s possible.

Gold’s breakout to new all-time highs also suggests a weaker dollar on the horizon. Regardless, I will continue to trade what’s in front of me.

That’s the problem with the currency markets: the trades aren’t working.

Our bullish dollar bets haven’t triggered as the entire FX market is chopping sideways.

In fact, my outlook for the euro and pound may flip bullish if today’s action spills into Friday’s close (quite the bearish scenario for King Dollar).

It’s a messy, range-bound trend. But stock market bulls love it!

Check out the S&P 500 $SPY overlaid with US Dollar Index:

The negative correlation between stocks and the dollar has been the most prominent intermarket relationship for almost a decade (dollar up, stocks down, and vice versa).

Notice the US Dollar Index peaked two weeks before stocks bottomed in 2022. It also rolled over last October, preceding the current stock market rally by four weeks.

Up or down, the US dollar’s underlying trend undoubtedly impacts equity markets. 

But it’s equally important to understand the intermarket implications of a sideways dollar. Spoiler alert: it’s also bullish for stocks.

A mean-reverting dollar also lends to positive stock market returns.

The S&P 500 gained roughly 25% while the US dollar carved out its 2021 bullish reversal (from the January 6th low to the November tenth breakout). And so far, SPY has climbed 13% since the dollar troughed last July.

But get this: the S&P 500 continued to climb for two months following the 2021 DXY breakout, tacking on another 2.5% before it peaked.

So even if the US dollar eventually breaks out of this range — and that’s a big if —  perhaps stocks only go up.

What do you think?

Is the dollar rally a done deal, and DXY is heading back below 100?

Or, are dollar bulls taking a page from the gold bug handbook, rolling with the punches before an inevitable breakout?

Either way, the market is rewarding us for owning stocks.

-Ian

Thanks for reading.

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