Dollar down but not out

Asian markets (apart from India) have all moved higher today following the positive closes in

Europe and the US on Friday as optimism continues to build on the prospect that the US and

China will settle their trade differences. All the latest soundbites thus far have been positive

as those bilateral talks continue again this week.

That optimism has in turn has fed its way into higher oil prices with WTI above $56 a barrel

this morning. It’s worth remembering the very close link between the price of WTI and

equity market direction in play at the moment-something that I have commented on before.

In order to see just how close that is, please take a look at a chart tracking the most recent

price of the S+P 500 and WTI.

This chart is a bit scatty, but I think it’s nevertheless clear to see how the price of WTI (white

intermittent line) and the S+P 500 (yellow intermittent line) are continuing to move in a

highly correlated way. Personally, I could make a serious argument for why I think that’s

ultimately a flawed correlation, but maybe that’s something for another time. Meantime,

lets just take it for what it is!

Irrespective of all that anyway; the latest equity market moves, from a global perspective,

haven’t yet dented the demand for gold which rose further overnight, touching $1325 an

ounce and almost matching its Jan 31 high of $1326. Meanwhile the JPY hasn’t moved much

so that JPY/XAU correlation, that I covered on Friday, has shifted further out of sink as this

week gets underway.

The dollar managed to grab defeat from the jaws of victory on Friday as the EURUSD

reversed from what was a fresh 2019 low at 1.1234. The rate is back above 1.1300 in early

trade this morning as the price action looks like it stranded a few short EUR positons on

Friday. A similar price dynamic unfolded on the GBPUSD too as that reversed from an

intraday low of 1.2773 on Friday to back above 1.29 this morning.

Consequently, the dollar index has continued to shy away from breaking above its 2018 high

of 97.71. The price peaked at 97.37 last week and has subsequently backed off to around

96.80 this morning. In respect of all of this, and at this stage, these latest moves on the USD,

EUR and GBP look attributable to profit taking on long dollar exposure and little else as far

as I can tell. So, from a longer term perspective I don’t yet see any reason to diverge away

from a positive dollar bias.

So, as far as those equity markets are concerned, its still a case of prices correcting their

heavy December falls and I think that’s best demonstrated by looking at another chart of

the S+P 500- on its own this time.

This chart shows the price of the S+P 500 continuing to rebound and retrace its move from

an all time high last year (at 2941) to a low of 2346 posted at the end of December. As you

can see, this rebound has taken out several of the potential corrective targets and now only

one significant one remains- at 2800- the white parallel line that is next on the upside and

just above the 2775 close on Friday. US markets are closed for ‘Presidents Day’ today so we

won’t get a move above 2800 in any case later on, but it is nevertheless a level to be mindful

of because a significant break of this could mean we are in for a move back to the all time

highs again.

Whilst I don’t personally believe the current environment is right for that, I do have to

respect the possibility of it happening. If it does, then it will have implications for the FX

market and the dollar and the JPY in particular.

Important Economic Releases Due this Week

19/02- 12.30am RBA February 8 th Policy Meeting Minutes

19/02- 9.30am UK January/December unemployment report

19/02- 10.00am German and European February ZEW Survey

20/02- 7.00pm US FOMC Minutes from January 30 th Meeting

21/02- 12.30am Australian January Unemployment Report

22/02- 10am Eurozone Final January CPI Reading

22/02- 1.30pm Canadian December Retail Sales