Could we get the best of all worlds? Strong equities + strong Dollar? The Chicago PMI this morning was excellent – very bullish. The first truly good fundamental news in a while. We also got a report that crop planting acreage topped estimates, which has sent grain prices tumbling, and the broad commodity index has fallen despite a very weak US Dollar today. Another serious (bullish) breakout that has occurred is in yields. TBT has crushed 4 straight days, and looks to have easily broken out.
So we have some stars are aligned for equities to perform well from here:
-Treasuries have fallen very hard and broken support.
A lot of sentiment indications are that the US Dollar may have bottomed (here, here, and here, for example) and may be reversing – though it failed to break out and has fallen back to its support in the last week.
So the big question is – could the US Dollar rally, commodity prices fall, and yet have the equity markets continue to make gains? That would be like the 90’s, a best case scenario. The PMI would indicate a strong economy which is typically good for a currency, though the good news puts us in “risk on” mode, which has meant weak Dollar. Dueling drivers for the Dollar's price action.
I suspect everything hinges on the US Dollar and what it does around this price. To continue its recent pattern of higher lows, it needs to hold about 74.40, by my estimate, meaning the Euro needs to stay under 1.45 or so. Word is that China is in the market buying the Euro and selling the Dollar, so it’ll be interesting to see if the Dollar can resist that downward pressure.
1) what will the Dollar do at support (a break under support would definitely suggest piling into stocks makes sense), and 2) Is it possible for equities to hold strong in the face of a Dollar rally, given the technical breakouts and good economic news today?