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Dollar and S&P 500 Courses Diverge - A Falter for Greenback or Risk?

Dollar and S&P 500 Courses Diverge - A Falter for Greenback or Risk?

John Kicklighter,

Talking Points:

  • Another jolt of fear in the financial markets - this time based in US politics - leveled out before turning septic
  • With the Dollar and S&P 500 bearings diverging, the foundation for complacent risk appetite may be falling apart
  • Event risk takes a back seat to themes next week as US President Trump heads to the Middle East, then NATO and G-7 Summits

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Another shock of volatility has coursed through the markets this past week without leaving us in a lasting dive. The rebound doesn't seem to come with the roaring confidence of a universal return to record or multi-year highs. The S&P 500's recovery following its sharpest single-day gap lower since the height of the financial crisis has yet to see us 'close the window'. In contrast, the more intense risk bearings of the EEM Emerging Market ETF showed an extreme dive lower and equivalent reversal the following day. Churning sentiment seems to magnify the intensity of these assets at the extreme end of the spectrum while the more liquid of the assets measure their moves. Yet, with this, there may be evidence the foundation for complacency is eroding. At the forefront of this disparity is the Dollar's downturn.

This past week, the DXY Dollar Index accelerated its losses into the week's close to measure the largest weekly decline in a year. That seems to contrast to the currency's recent alignment to traditional risk assets. The medium-term correlation between the Dollar and US equity indexes has championed the markets appetite for marginal returns and more heavily for those assets with the prospect of yield into the future. These are markets in which capital gains are the only true vehicle for return as global yields are scouring record lows thanks to extreme easing efforts by global central banks. As the blind search for slight advantage fades, we find the assets that depend on future gains and slight premiums will be among the first to lose their backing. This will be a critical relationship to monitor for a broader understanding of risk trends in the week ahead. Pairs like EUR/USD, GBP/USD and USD/CAD with considerable technical and fundamental will secure their breaks and trends on the support of the greenback.

For drive in the week ahead, the docket has its fair share of highlights including global PMI figures. However the emphasis will have much less to do with schedule event risk and far more to do with the general themes that linger not far from the mass's fears. In particular, the recent flare up for US political uncertainty will carry forward as President Trump makes a trip abroad to critical global meetings. A stop in the Middle East and Italy will look to stabilize tension along religious lines. It will be his participation in the NATO and G7 summits however that carry the true weight for global stability. What should we watch for key Dollar based majors (like EUR/USD), global equity indexes, commodities and Bitcoin going forward? That is our focus in this weekend Trading Video.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.