DOLLAR SURGES TO NEARLY THREE-YEAR HIGH -- PLUNGING YEN HURTS JAPAN ISHARES -- WEAK EM CURRENCIES HURT EEM ISHARES --U.S. STOCKS LOOK VULNERABLE TO SOME PROFIT-TAKING
U.S. DOLLAR INDEX BREAKS OUT TO THE UPSIDE... The strong rally that started in the dollar in January passed another technical milestone this week. The daily bars in Chart 1 show the U.S. Dollar Index rising above its September/October peaks in yesterday's trading to reach the highest level in 34 months. The green up arrow shows it trading higher again today. Part of that move into the dollar may reflect some loss of confidence in foreign stock and currency markets which may be more vulnerable to the coronavirus. That can be seen in big drops in several developed and emerging market currencies. And that in turn is weighing on foreign stock ETFs that are quoted in dollars. That's especially true of Japan and emerging marketswhich are taking bigger hits today. At the same time, global bond yields continue to drop which reflects a continuing flight to the safety of bonds. Lower bond yields are also helping push the price of gold to a seven-year high. That's causing some selling today in U.S. stocks that may be vulnerable to more short-term profit-taking. Foreign stocks are leading today's global pullback. Let's start with Japan.
YEN TUMBLES TO 10-MONTH LOW...The euro is the biggest part of the Dollar Index (57%) and has fallen this week to the lowest level in nearly three years. The Japanese yen is the second biggest USD currency with a weight of 13.6%. And it's falling hard as well. The daily bars in Chart 2 show the yen tumbling -2% this week against the dollar to the lowest level since last spring. That's due mainly to weak economic news suggesting that Japan may be sliding into recession. And that's taking a big toll on Japan iShares (EWJ) which are among today's biggest foreign losers.
FALLING YEN HURTS JAPAN ISHARES... The red daily bars in Chart 3 show Japan iShares (EWJ) tumbling this week to the lowest level in four months (and in heavy trading). It's nearing a test of its 200-day moving average (red arrow). The EWJ has fallen -2.7% this week; but most of that slide is due to the -2% drop in the yen against the dollar. That's because the EWJ is quoted in a stronger U.S. dollar versus the weaker yen. A message written on February 8 explained that a rising dollar has a negative impact on foreign stock ETFs that are quoted in dollars. Which could make them less appealing to American investors. That's especially true in Japan. Emerging market currencies are also in decline this week. And that's taking a negative toll on Emerging Markets iShares (EEM).
WEAK EM CURRENCIES WEIGH ON EM ISHARES... The stronger dollar is also taking a toll on emerging market currencies and stocks. The red bars in Chart 4 show the February peak in MSCI Emerging Markets iShares (EEM) falling well short of their January high, and falling below their 50-day moving average today. Part of that selling is because of weakening EM currencies. The green line in the upper box plots the WisdomTree Emerging Currency Fund (CEW) which peaked in January and has fallen to the lowest level since November. The chart shows a mostly positive correlation between the two which means they normally rise and fall together. Right now both are falling. The CEW includes the Chinese yuan which has also fallen to a two-month low. Part of the reason for that selling is that EM countries own a lot of debt denominated in U.S. dollars. A rising dollar makes it harder to service that debt.
S&P 500 LOOKS VULNERABLE TO SOME PROFIT-TAKING... With foreign stocks under pressure, U.S. stocks may be vulnerable to short-term profit-taking as well. The blue line in Chart 5 shows the All Country World ex US iShares (ACWX) diverging from the S&P 500 during February. [The ACWX includes foreign developed and emerging markets]. That's one warning. The two upper boxes also show the 14-day RSI line and daily MACD lines remaining beneath their January highs, and not confirming the SPX move into record territory. None of those lines pose a serious threat to the market uptrend. But suggest that the rally in U.S. stocks may be overdone on the upside and vulnerable to short-term profit-taking. Weaker foreign stocks also increase that risk. That's one of the potential downsides of a stronger dollar. That's especially true for large U.S. multinationals that get a lot of revenue from foreign trade. A higher dollar makes their exports more expensive to foreign buyers who have to pay for them with weaker local currencies.
