THE DOLLAR HAS FALLEN THIS WEEK AGAINST THE EURO AND POUND -- BOTH CURRENCIES HAVE RALLIED ON HOPES FOR BREXIT SETTLEMENT -- EUROPEAN STOCK ETFS HAVE ALSO BEEN RISING -- THOSE GAINS, HOWEVER, COULD DEPEND ON SATURDAY VOTE IN PARLIAMENT
DOLLAR FALLS AGAINST EURO AND POUND...Chart 1 shows the Invesco US Dollar Index Fund (UUP) falling this week to the lowest level in two months. Most of that drop has come against the Euro and British Pound. Chart 2 shows the British Pound rising to the highest level in five months. Chart 3 shows the Euro rising to the highest level in two months. Although the dollar fell against other currencies, the two European units account for nearly 70% of the direction of the UUP, and were two of the week's strongest currencies. Their recent gains are tied to renewed hope for a Brexit settlement between the UK and EU which was approved in Brussels this week. The real test, however, will come this weekend when the British Parliament votes on the issue. That Saturday vote could determine if this month's gains in the two currencies continue or falter. The same is true of their stock ETFs.
GERMAN AND UK STOCK ETFS GET BOOST FROM RISING CURRENCIES...Stock ETFs in Europe have also been rising. France and Germany have been especially strong. Chart 4 shows the MSCI Germany iShares (EWG) climbing to the highest level in three months and nearing its high for the year. The EWG:SPX ratio in the upper box shows EWG climbing more than the S&P 500 over the past month. [France iShares (EWQ) are doing the same]. Chart 5 shows the MSCI United Kingdom iShares (EWU) rising to the highest level in two months after exceeding its September high. The EWU:SPX ratio (upper box) shows the EWU also rising faster than the SPX this month. European stocks have also led this month's strong performance in foreign developed markets.
Chart 6 shows the MSCI EAFE iShares (EFA) nearing its high for the year and outpacing U.S. stocks during October. [EAFE tracks foreign developed markets outside of North America]. The three charts paint a more positive picture for foreign shares. Some of those gains, however, have come from their stronger foreign currencies. That's because foreign stock ETFs are quoted in dollars which are falling right now. Which suggests that the rally in European stock ETFs (and EAFE) is very dependent on the direction of their currencies. And that will probably be decided in London over the weekend. So could the direction of the U.S. Dollar.
FALLING DOLLAR COULD FAVOR FOREIGN STOCKS...So far this year, a rising dollar has lured foreign funds into U.S. stocks which have been the strongest in the world. A weaker dollar could reverse that flow and cause funds to rotate out of the U.S. and into foreign stocks. October has seen that happening in Europe. We'll take another look at that issue after the weekend vote.
