DailyFX

Dollar Leverages Gains on Mixed Risk, Equities Showing

John Kicklighter

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Range Trade Strategies work best in quiet market conditions - such as the Asia trading session

Dollar Leverages Gains on Mixed Risk, Equities Showing

We are seeing another serious fundamental divergence. The S&P 500 – as a benchmark for risk appetite – has charged higher for three consecutive days while the FX safe haven Dow Jones FXCM Dollar Index (ticker = USDollar) has closed at a fresh multi-year high. This hand-in-hand move breaks the normal conventions of capital moving into either high-return or safe assets. That said, it isn’t a particularly uncommon sight nowadays. There are some that think that this is a sign that the greenback is playing the role of a ‘carry’ currency, but themore plausible scenario is that risk trends themselves are not offering a strong and consistent drive.

Rather than relying on a single benchmark or two to establish a sense of the strength and bearing of investor sentiment, we should take the temperature of a cross-market drive across the market’s dominant asset types. If there were a strong bearing of ‘risk on’ or ‘risk off’, we typically expect equities, carry trade, speculative commodities and Treasury yields to all move in the same direction. The heavier the momentum behind the collective move, the greater the influence of sentiment. However the push to expose capital to greater return or flight to quality has been lacking for momentum as of late. Between uneven growth and the implicit vow by central banks to backstop risk taking, we have found an unsteady equilibrium. And, in the place of speculative appetite, we are left to catalysts like relative stimulus and short-term data sparks.

Taking the temperature of the dollar’s performance this past trading day, while the USDollar topped a new high; the greenback further managed a gain against all of its major counterparts. A surface-level interpretation of this move can be ascribed to confidence in the housing sector as new home sales rose (1.5 percent) and average annual sales price growth hit its highest level since 2006. More likely, the slow progression of benchmarking the end of QE3 purchases carries more weight. Meanwhile, an incidence this past session inadvertently reminds us of how tense the market is to an eventual swell in risk trends. An errant tweet through a hacked AP twitter account that explosions were reported at the White House presented a dramatic market reaction for equities and the USDJPY. Though quickly disarmed, we are left with a warning.

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