US Dollar Breaks Out Fri, Aug 20, 2021 After roughly two months of declines, at the end of May the US dollar (proxied by Bloomberg's dollar index) found support around the lows from the first week of the year. Since then, the dollar has rallied 4.13%, moving back above its moving averages in the process which have also acted as support ever since. This week alone the dollar has gained 1.4%, and that upward move brings the dollar to the highest levels since early November and the early spring highs when the index stopped short of its 200-DMA. Taking a step back to look at the past five years, those lows that were reached earlier this spring and at the start of the year can actually be traced all the way back to early 2018 lows. Similarly, the recent highs that were taken out this week are around the same levels as the early 2016 lows. With the dollar now having broken out, it is no longer at the low end of that five-year range.
Near Record Consistency for the US Dollar in April Mon, May 2, 2022 The US dollar performed incredibly strong in the month of April, gaining a total of 4.7%. In addition, there were only three trading days in which the US Dollar Index traded lower, which constitutes a monthly positivity rate of 86%. Notably, this is the third-highest positivity rate on record (since 1971), falling short of just July 1975 and May of 2012. In this week's Bespoke Report, we conducted a deep dive into the dollar's recent strength. You can access this report by becoming a paid subscriber today. The month where the Dollar Index experienced the highest consistency of positive returns was in May 2012 when it finished higher on just under 87% of the month's trading days. During that month, the Dollar Index recovered after falling 175 basis points between the end of 2011 and the start of May. In May alone, it rallied 542 basis points, more than erasing the YTD losses heading into the month. Economic weakness in Europe and concerns over Greece being able to make its debt payments also caused a rotation into dollar-denominated assets. In July of 1975, the Dollar Index traded higher on 86.4% of the month's trading days. Back then, the US was emerging from a recession as the economy was beginning to show signs of strength. Inflation was running hot, which caused short-term interest rates to rise and attracted foreign investors, thus boosting demand for the dollar. Last month, demand for the Dollar moved consistently higher as higher yields attracted foreign investors. In addition, weakness in the Yen attracted foreign capital as well. With just three down days during the month, the Dollar Index was up on 85.7% of the month's trading days. In November of 1978, the daily positivity rates for the US Dollar Index hit 80%. The dollar had experienced weakness leading up to November, shedding 13.9% of its value on a YTD basis. Rates continued to tick higher amidst a high inflationary environment. As mentioned in our Conference Call Recaps, strength in the US dollar acts as a headwind to Corporate America, as constant selling prices in foreign countries leads to less favorable currency conversions. So, how have equity markets performed during and after strong months for the dollar? In May 2012, the S&P 500 lost 6.3% but gained 4.0% in the following month. Three and six months out, the index was up 7.3% and 8.1%, respectively. In July 1975, the S&P 500 traded down by 6.8% and proceeded to lose another 2.1% in the following month. Three months out, the S&P 500 was up just 33 basis points. However, six months out, the index had gained 13.6%. Lastly, in November 1978, the S&P 500 gained just 1.7% after trading down by 9.2% in the previous month. In the following month, the index gained 1.5%. Three and six months later, the index was up 1.7% and 4.6%, respectively. For the sake of comparison, in April of this year, the S&P 500 shed 8.8% of its value, so weakness in equities during months where the Dollar Index has been very consistent to the upside is not necessariliy out of the ordinary.
The Overbought Buck Tue, May 17, 2022 The US dollar has surged amidst the weakness in risk assets in 2022. While also part of a longer-term and more gradual uptrend over the past year, in the past couple of months the Bloomberg Dollar Index has seen its uptrend steepen significantly. Since the last retest of its 50-DMA at the end of March, the dollar was up over 6% through the closing high last Thursday. To round out last week and start this week, the dollar has pulled back sharply with a 1.25% decline. While that may not sound like much, it ranks in the third percentile of all 3-day moves going back to the start of the index in 2005. At the moment, the dollar is testing the aforementioned steep uptrend off the late March low. Assuming that the uptrend or any recent lows do not provide support, the dollar has much further to go until it would test its 50-DMA. In fact, the dollar would currently need to fall another 2.28% to reach its 50-DMA as it has consistently traded well above that moving average for multiple weeks in a row. As shown in the second chart below, the dollar recently hit some of the most overbought levels of the past five years, and the long stretch of days with overbought (1+ standard deviation above its 50-DMA) readings has continued. While recent declines have put the streak on the ropes, today marks the 30th consecutive trading day that the dollar has been at least one standard deviation above its 50-DMA. Going back through the history of the index, there have only been 8 other streaks that have also gone on for at least 30 trading days. The most extended of these ended in February 2015 at 85 days long. The next longest only occurred shortly before that in October 2014. Additionally, given the dollar has been pulling back, it could be reasoned that stocks with heavy domestic exposure would underperform relative to those with more international exposure. Since last Thursday, that has largely been the case. In the chart below, we have broken down the Russell 1,000 into deciles based on their share of revenues generated from abroad. The first decile is composed entirely of stocks with 100% of revenues generated within the US while the tenth decile is the stocks with the most international exposure. That tenth decile has seen notable outperformance with an average gain of nearly 6% versus an average of 4.2% for all other deciles. The eighth and ninth deciles have also averaged stronger returns than most other groups while the worst performance comes from the first decile, the 100% domestic stocks.
Dollar in Demand Means Domestic Domination Mon, Aug 22, 2022 The US Dollar Index (DXY) is at the highest level in a little over twenty years today, bringing the total rally off of the January 2021 low to +21.8%. While that is a notable new high, a massive reason for the move has been a result of the Euro as it is now back to parity with the dollar. The composition of the dollar index places a massive 57.6% weight on the Euro, meaning swings in EURUSD largely impact DXY. As shown in the chart below, the Dollar index just hit another multi-year high today and is back to levels last seen in the early 2000s. A stronger dollar hurts companies that generate larger portions of their revenues outside of the US, and we've seen that play out in terms of stock market performance during the dollar's 18+ month rally. We keep track of geographic revenue exposure for stocks in the Russell 1,000 in our International Revenues Database (available to Bespoke Premium and Bespoke Institutional members). Below we show the average performance of Russell 1,000 stocks that generate 50% or more of their revenues outside of the US since the Dollar Index's low in January 2021. We also show the average performance of Russell 1,000 stocks that generate 90%+ of their revenues domestically, which should benefit from a stronger dollar. As shown, the average 'domestic' stock in the Russell 1,000 has risen 16% during this dollar rally, while the group of internationals (stocks with over half of their revenues generated outside the US) have risen less than 3%. As for the rest of the stocks in the index which do not fall into either category, the average gain has only been 4.62%. Taking a more granular look, below we break down the Russell 1,000 into equal sized deciles based on the international revenue exposure with the 10th decile comprised of stocks with 100% of revenues generated domestically. Again those groups with high domestic revenues are massively outperforming with the ninth and tenth deciles having experienced rallies of 14.15% and 17.47%, respectively. The other end of the spectrum have seen low single digit rallies and even a modest 22 bps decline for the third decile. Given the nature of various businesses, some sectors naturally will have greater domestic/international revenue exposures than others. For example, Utilities and Real Estate whose operations are largely within the US have nearly all of their revenues generated domestically. At the same time, these two defensive groups have been some of the top performing sectors since the dollar's low. Energy has posted much stronger returns than any other sector while it also has the fourth highest domestic revenue exposure behind Financials. Materials and Tech have the lowest share of revenues generated within US borders while their returns since last January have been middling.
Dollar Index Inflating Tue, Sep 6, 2022 It's a bit ironic that just as inflation is raging at the highest levels in decades, the value of the US dollar (at least relative to other currencies) has been surging. Imagine where we'd be if the dollar was falling in value. Just last week, the y/y change in the US Dollar Index topped 18.4% which is a rate of change not seen since the summer of 2015 when China was devaluing the yuan. Throughout the history of the US Dollar Index, there have only been a handful of other times that it has rallied this much over a year. Even rarer have been times when the y/y change exceeded 20%. The dollar has already seen a big gain, but could this rally match the rarified air of prior 20%+ y/y rallies? Anything is possible, but to get there, it's going to have to do some heavy lifting. Just looking at a chart of the y/y change since the start of 2020, the momentum of the rally, while still trending higher, has slowed to more of a rangebound area than the blistering momentum experienced in late 2021 and early 2022. A price chart of the Dollar Index illustrates why. For much of 2022, the comps for the y/y change have been relatively easy as the dollar sold off from its initial COVID surge and traded down to its lowest levels since 2018 and before that levels not seen since 2015. The Dollar Index then made a double-bottom last summer and started to rally in the fall. Therefore, now that the rally is starting to 'lap' its early stages, the comps are increasingly tougher. From 9/6/21 to 10/6/21, the US Dollar Index rallied 2.4%, which means that just for the y/y change to remain at current levels, it would need to rally at least that much and then more on top of that to push the gain up to 20%.
Possibly heading to test 108.2 area. Not sure the common opinion here but think we head much, much higher this year and next. Haven't logged on here in years, just got that email from Cy and thought I'd check it out again.
Thanks for sharing and I'm also siding with more bullish dollar move for the next year + also it's great to see you checking back in here again been a long time! Missed you and the old crew tremendously and often get that "reminiscing" feeling. Good to see my e-mail went through w/o a hitch haha.
