Tuesday, October 27, 2009

It's all about the dollar

OK, I'll chime with other traders who are harping about the latest market moves being inversely correlated to the US dollar. The longer term move from March lows, however, did not start out nearly as correlated to the dollar decline.

As the first chart shows, the SPY (red line) has risen 55% while the US dollar has declined 15% (the blue line is the UDN, the inverse dollar ETF)... correlation in direction, but not in the degree of movement.

The next chart shows the market for the last nine weeks, with the dollar and SPY showing near perfect inverse correlation in direction and magnitude. If the dollar shows regression to the mean over the next few weeks, or a short squeeze in the shorter term time frame, this should bring the SPY back to end of August levels of 104 or below.

Ambrose Evan Pritchard has an excellent commentary on dollar sentiment and economics, the news of its certain demise may be a bit premature.

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