Consumer Confidence is Helping the Dollar

by: David Andrew Taylor

Who else is feeling confident?

I've actually been calling for the dollar to move higher for some time. I just expected the actual impetus to be something a little more important than the Conference Board's Consumer Confidence. But, it was a one-two punch overnight with the German IFO first and now consumer confidence that is driving the dollar higher.

The fact that confidence is moving higher shouldn't be too much of a surprise to readers of this site. I've outlined a few times the correlation between consumer confidence and personal income. As income moves higher, on the aggregate, so does confidence. And why wouldn't it? If you're earning more, you're feeling better about life in general. Here's the chart on Consumer Confidence vs. Personal Income (which will be updated on Friday):

(Click on thumbnail to enlarge)

If you want a good idea of how confident Americans are going to be looking forward, just peel those oculars of yours on over to the far right of this chart. See that red line heading straight up? That's the rate of growth in incomes for Americans. Confidence is sure to follow, as this chart goes.

My FX Trading Plan:
I've been shorting currencies vs. the dollar for some time now. I've been using my usual options strategy. For the most part, as long as the currencies are as tightly wound up as they are, then my strategy will work out. If the dollar gets stronger, then again, my strategy works out and I get a few more options to work with as there is finally movement.

My S&P Trading Strategy:
I put on a risk reversal on the index a few weeks ago looking for the S&P 500 to push up through the 1330 level. How do you spell ecstatic? See, we've got incomes moving higher, which will push consumption higher, which pushes receipts up higher, yadda yadda yadda, the S&P 500 is going to move higher from here. Factor in oil at much lower rates, and consumers have even more money to buy other things aside from gas at the pump, and businesses are more profitable across the board.