Stock Markets Waiting on U.S. DollarStock-Markets / Stock Markets 2016 Jan 22, 2016 - 11:06 AM GMT
It appears that the outcome of the world markets may depend on the behavior of the USD. The pattern is now clear, after a long consolidation. The rising domestic markets have been dependent on the rising dollar. This has made especially so by the emerging markets as they have to buy back dollars to repay dollar-denominated debts which they so eagerly took over the past several years. This has caused a terrible squeeze on their economies and the Emerging Markets stocks and bonds.
Then there’s China. They have about $3 trillion of US Dollar reserves that they can sell to prop up their falling stock market. This may be the key to the next decline in the USD. When the Chinese equities markets begin to fall again, The Chinese may begin to sell their dollar reserves en masse to keep the Yuan near parity and their markets afloat.
A decline beneath 98.50 in the USD would likely trigger a sell-off, taking the equities markets with it.
Even though the USD appears to be on an uptrend, since November 17, the Yen has risen 6.3% while the USD has remained flat in that same time period. That has given the Yen most favored status as a safe haven in declining equities markets in the past several weeks.
Yesterday the Yen peaked while the SPX bottomed. That gives us a short retracement window in which the Yen may consolidate at a lower level such as the 50-day Moving Average at 82.63, which is near the 61.8% Fib retracement.
The Yen may find a Master Cycle low as early as Friday, January 29 or Monday, February 1. Remember that the Cycles Model suggests a probable turn (down) in the SPX on the 28th. The Japanese markets open after our market is closed, so the relationship makes sense from a timing perspective.
As a result of the strengthening Yen vis a vis the USD, the SPX declined 18.28% in Yen as opposed to a 14% decline that we experienced domestically since mid-November. As a result, the Japanese, who had been big fans of the US equities markets in the past, are probably more anxious to sell the rally than we are.
But that will lead to huge opening gaps, as the Japanese unload their stocks before our cash markets open.
All of the above factors and more that I cannot mention will have a huge effect on the rally. The smallest break may lead to an immediate cascade in equities, in my opinion.
As a result, we may have to monitor this retracement rally closely. It may prove more judicious to take profits early than late if you have reversed your trades with the reversal in SPX.
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