Friday, September 9, 2011

Dollar Starting to Pay Off

For months we have been wondering when the dollar will finally start to move higher versus the euro. The problems in Europe are massive and they will not go away. And yet the Euro seemed to be hanging around -- the damn thing has alligator blood. Well, the dollar is finally having its day. The market is pricing in a 95% chance of default on Greek debt, and Germany is prepared to shore up German banks in case of default. Euribor is spiking once again and the global system is experiencing tremendous amounts of stress. This feels eerily similar to 2008, only the epicenter is in Europe.

After a four month consolidation at levels close to the all-time-low in the dollar, the greenback has risen above the 76 range resistance and is trading above the 200 Day Moving Average (yellow line) for the first time since September 2010. Momentum is making a new high and the move is pushing the dollar above its one standard deviation trend as measured by the Bollinger Band. These are all great technical developments for our currency, but they are not great developments for the ‘risk assets,’ including stocks. Since 2008 the dollar has a 55% negative correlation to the stock market. That means when the dollar is up there is a very good chance that the stock market is down. Today, the S&P 500 is falling 2.5%.

For a brief moment there, I was in a good mood.