Over the past half-decade or so, we’ve seen the US Dollar Index maintain a very high negative correlation with risk assets.
When stocks are doing well, the Dollar has normally been under pressure. And when stocks have struggled, as most of them have over the past year, the US Dollar has kept a bid.
Look how poorly the Dollar did when stocks ripped in 2020 off those pandemic lows. And then look at the strength in the Dollar over the last year as most stocks have struggled:
The US Dollar Index is currently flirting with a key retracement level from its pandemic peak.
I think if you start to see the Dollar breaking below that and approaching 97, and even breaking below 97, then there’s your catalyst.
Look at the US Dollar Index compared to an advance-decline line of currency crosses vs the USD.
You notice how with new highs in the $DXY, you’re NOT getting new highs in the A/D line?
That’s a real divergence.
My bet is that if this is a failed breakout in the Dollar Index above 98, and the unwind is just beginning, this is likely to act as a major tailwind for risk assets.
We’re buying stocks.
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See you then!