Written by Bruce J. Clark
April, 18, 2019
The good news is that the US economy appears to be in much better shape than was forecast barely a month ago. Stronger than expected numbers this week on trade, inventories and retail sales have sharply lifted estimates for first quarter GDP which is due to be reported next Friday (Apr 26). The widely-watched tracking model published by the Atlanta Fed now estimates a pace of 2.8%, up from a reading of near zero as recently as March 12. http://bit.ly/2GlNPc3
The bad news is that this renewed economic momentum has potentially set the US dollar in motion for another leg higher after drifting sideways for the last several months. And as we learned in 2018, a stronger dollar does no favors for global asset prices and the ongoing effort by the central banks to reflate the markets. See “Beware the dollar”
Even though the broad dollar index (DXY) has yet to break through resistance, several key dollar FX pairs appear to be showing the way. The first chart below of the dollar against the Swiss franc is especially bullish.
The second chart overlays the dollar with the benchmark emerging market equity ETF (EEM). I watch EEM closely as a leading indicator of global risk sentiment. If there’s a change in investor appetites, it’s going to show up there first. The historically tight correlation between the two has weakened this year but to ignore the impact that a higher dollar could have on equities is simply betting against history.
Stock markets have generally had a great run over the last 14 weeks but they are losing momentum. Yesterday the S&P traced out a bearish technical reversal as noted here: “The sound of one hand clapping” If the dollar is breaking out, the case for reducing risk becomes even stronger.