For the better part of the last year the U.S. dollar and U.S. equities have been like two best friends on a see saw. If equities went down the dollar went up; equities go down, dollar goes up.
However, last week we saw a change in behavior, as the U.S. equity markets hurdled toward new highs the dollar remained range bound. Even with the strength in shares prices, the U.S. Dollar Index remains above its lower bound of 78.33. This may signal a shift in sentiment among the currency crowd.
If the global economy is recovering then the U.S. is the only country that can truly lead a global recovery. To that end, U.S. assets become more attractive, and to buy those assets investors need dollars.
In fact, the TIC data released last week from the U.S. Treasury shows some evidence of just such a phenomenon occurring.
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In May, private foreign entities actually sold U.S. Treasury bonds and increased purchases of U.S. equities; private foreign purchases of equities increased by 359% month over month. Moreover, it was only February that foreigners were net sellers of U.S. equities. We note that the U.S. dollar increased from mid-March to April.
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As well, the most recent trade data indicated that exports of goods increased for the first time since February, just prior to dollar strength.
Furthermore, as other countries struggle with continued economic weakness they will be forced to increase quantitative easing (we are looking at you Great Britain!). Therefore, our theme remains the same; we are long U.S. dollars against currencies that have structural economic imbalances and whose leaders have publicly stated the desire for a weak currency. With the recent weakness in the dollar we fear we may be early on our timing, we shall keep stops and if stopped out look for a re-entry point.
Dislcosure: Short FXB and long SPY