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DailyFX
Dollar Restraint While S&P 500 Collapses - What Does it Mean?
John Kicklighter

  • Dollar Restraint While S&P 500 Collapses – What Does it Mean?

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Dollar Restraint While S&P 500 Collapses – What Does it Mean?

After four years of consistent speculative escalation behind ‘risky’ assets like the S&P 500, is faith in stimulus finally starting to crumble? If so, the bubble behind equity and other speculative assets presents a serious opportunity for safe havens like the US dollar. Typically on the opposite ends of the spectrum, the equity and FX market benchmarks have instead run on similar paths through 2013 – leading many to believe that one or both had changed their fundamental bearings. Yet, this unusual relationship does not reflect a role change for either, simply a lack of influence through that particular aspect – risk on / risk off. Under that logic, the extremely threatening move that the S&P 500 made this past session – a drop back to its 50-day moving average, seven-month trend floor and near 5-percent retracement threshold to 1,600 – should inspire the greenback to revive its role as ultimate safe haven. That said, the Dow Jones FXCM Dollar Index (ticker = USDollar) was little changed this past session having actually slipped 0.1 percent. This tells us that we are the verge of a seismic change, but we aren’t there yet…

There is a technical, market condition and fundamental view of why the critical rebalancing of sentiment has yet to be made by the market. For the highly-visible S&P 500, the painful slump has taken us to the brink (trendline, moving average, retracement milestone) but not officially broken support. Through market conditions, we have yet to see all those assets with either a definable ‘risky’ or ‘haven’ quality– nearly all liquid securities – fall back into the singular line of reasoning. Fundamentals is the aspect where we can best derive the disconnect and establish a time frame for when it will present itself. If the masses really wanted a reason to fall into line with risk trends, there is plenty to rationalize it: market yields are just off record lows, leverage usage is at a record high, participation is at a 15-year low (financial futures), asset prices are at a record highs, etc. However, there is a well-established trend and high-level of confidence in the Fed and central banks to keep volatility under wraps. And, while sentiment can often generate its own momentum once engaged; it may need a push to initiate the turn.

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