DOLLAR DIRECTION IS IMPORTANT FOR GLOBAL STOCKS AND COMMODITIES -- SAFE HAVEN BUYING HAS PUSHED JAPANESE YEN HIGHER AND STOCKS LOWER -- U.S. STOCK INDEXES TRY TO BOUNCE OFF AUGUST LOWS -- TODAY'S FED ANNOUNCEMENT COULD BE IMPORTANT
DOLLAR DIRECTION MAY HOLD KEY TO CRUDE OIL ... Everyone is waiting to hear what the Fed has to say today. Markets appear to hoping for a more dovish statement. Currency traders are also paying very close attention. That's because Fed policy has a big impact on dollar direction. And dollar direction has a big impact on other asset classes. For one thing, a strong dollar is bad for crude oil and other commodities. A close correlation currently exists between the direction of oil and stock prices. That suggests that dollar direction should also have an impact on stock prices. The weekly bars in Chart 1 show the PowerShares Dollar Bullish ETF (UUP) trading sideways since last spring. That sideways trading, however, is taking place within an uptrend. The upturn in the Dollar Index (green bars) in mid-2014 coincided with a plunge in crude oil. That's because a rising dollar is usually bad for most commodities. And that has been the case.
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Chart 1
SHORT-TERM DOLLAR TREND IS NEUTRAL ... The daily bars in Chart 2 give a closer look at the recent trend in the Dollar Index (UUP). The general trend is still up. However, the dollar is trading below its early December peak. Its 14-day RSI line (top of chart) and daily MACD lines (below chart) are modestly positive. Overall, the short-term pattern has a neutral look to it with a slight upward bias. That may change one way or the other after the Fed announcement. The Euro and yen have gained against the dollar over the last two months (more on the yen shortly). Commodity-related currencies have fallen against the greenback. That includes the Aussie and Canadian dollars. The British pound has also weakened. Emerging markets have fallen against the dollar which has caused problems in EM stocks. That's especially true in commodity exporters like Brazil and Russia. So a lot is riding on dollar direction. In general, a stronger dollar could be bad for global stocks and commodities, while a weaker dollar could be beneficial. No doubt dollar strength is one of the factors influencing what the Fed is thinking. I doubt if it wants the dollar to climb much higher.
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Chart 2
YEN SURGES IN FLIGHT TO SAFETY ... The Japanese yen has been the world's strongest currency. The green bars in Chart 4 show the Japanese yen surging between December and January. Money usually flows to the relative safety of the yen when global stocks are under pressure, especially in Japan. The surges in the yen during August and since December coincided with sharp downturns in Japanese stocks (orange line). The same is true of global stocks in general. The green bars show the yen starting to weaken over the last week. That pullback has coincided with a relief rally in global stocks in Japan and elsewhere. There again, the direction of the yen (versus the dollar) could also have an impact on the direction of stocks.
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Chart 3
STOCK INDEXES STILL TESTING 2015 LOWS... The stock market remains at a critical juncture. Chart 4 shows the Dow Industrials trying to stabilize right around their August intra-day low. That's an important test. Moving average lines remain negative. The green line in Chart 4 is the 20-day average. That's the first barrier the Dow needs to clear to signal a short-term rebound. Chart 5 shows the Nasdaq Composite in a similar situation. Longer-range indicators remain in negative territory. If the U.S. market is going to make a stand, this would be a good place to do it. That makes today's Fed's announcement all the more important.
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Chart 4
