FOREX: Dollar Won’t Rally Unless the S&P 500 Finally Collapses…With Conviction

Dollar Won’t Rally Unless the S&P 500 Finally Collapses…With Conviction

It seemed as if the dollar was finally on track to put in a long-awaited recovery heading into the final trading day of this past week. And yet, the remarkable bullish drive the currency was able to secure in the Asian session was completely retraced by the time the New York markets closed. The responsibility for this failed rally fell not to the US economic calendar, Fed talk or the seemingly intra-day fluctuations in growth expectations (as many financial media sources would have us believe); but rather, it was the direct performance of the S&P 500. As we have discussed numerous times before, the greenback is fundamentally valuable in only a few scenarios. Generally, when risk appetite is climbing, low rates in the US encourages borrowing and reinvestment abroad; and even in most circumstances, investors seeking safety will unwind carry through the yen or divert funds to the Swiss banking system. To truly bolster demand for the dollar, we need safe haven flows and concern that the global financial markets themselves are freezing up. That was the initial sentiment Friday morning with the record-breaking earthquake in Japan and a preliminary collapse in global equities. However, follow through was not meant to be; and the speculative markets would quickly stabilize and rebound to non-threatening levels. That said, doubt has already started to seep in. A follow up decline this week will not be so easy to correct.

Looking ahead, not only does the month-long period of congestion and hesitant efforts to sell off risky positions put investor sentiment in danger (and the dollar in a position to rally); but the lack of conviction in Friday’s recovery undermines the effort to keep markets buoyant. Looking at turnover over the S&P 500, volume was 19 percent lower than the previous day’s activity and other risk-sensitive assets marked a similar lack of conviction. The docket ahead holds meaningful data and speeches; but dollar traders should be watching correlations and not the ticker.