Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Inflation Consequences for the Stock Market, FED Balance Sheet - 24th Oct 21
To Be or Not to Be: How the Evergrande Crisis Can Affect Gold Price - 24th Oct 21
During a Market Mania, "no prudent professional is perceived to add value" - 24th Oct 21
Stock Market S&P500 Rallies Above $4400 – May Attempt To Advance To $4750~$4800 - 24th Oct 21
Inflation and the Crazy Crypto Markets - 23rd Oct 21
Easy PC Upgrades with Motherboard Combos - Overclockers UK Unboxing - MB, Memory and Ryzen 5600x CPU - 23rd Oct 21
Gold Mining Stocks Q3 2021 - 23rd Oct 21
Gold calmly continues cobbling its Handle, Miners lay in wait - 23rd Oct 21
US Economy Has Been in an Economic Depression Since 2008 - 22nd Oct 21
Extreme Ratios Point to Gold and Silver Price Readjustments - 22nd Oct 21
Bitcoin $100K or Ethereum $10K—which happens first? - 22nd Oct 21
This Isn’t Sci-Fi: How AI Is About To Disrupt This $11 Trillion Industry - 22nd Oct 21
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

U.S. Dollar Stabilization and the Stock / Gold Ratio

Stock-Markets / Financial Markets 2009 Jul 28, 2009 - 11:17 AM GMT

By: Ashraf_Laidi

Stock-Markets

Best Financial Markets Analysis ArticleDollar weakness has been excessive...at least for now..

The overnight wave of dollar selling was mostly led by a fresh wave of buying in commodity currencies (rather than only rising equities) courtesy of +$70 in crude prices and hawkish comments from the Reserve Bank of Australia raising the possibility of rate hikes before a peak in the unemployment rate. Markets were already expecting the RBA to raise rates by 25 bps by year-end.


Todays comments further boost the long term viability of the currency. But current US dollar weakness shows to have grown unsustainable considering the related expansion in risk appetite and the lack of unjustifiable data developments in the Eurozone, UK, Canada and New Zealand--and not to mention recent rhetoric from central bankers and finance Ministry officials to jawbone the latest strength in their currencies. Accordingly, we cannot ignore the flattening momentum in G-5 equities over the last 3 sessions, which is beginning to appear similar to the period prevailing in the first week of June.

The Dollar Index (basket against 6 currencies with EUR accounting for 57% of the basket) has tested the June lows at 78.31, a break of which would be the lowest since December. We should once again expect to hold at 78.25 -- the 61.8% retracement of the rise from the 71.29 low to the 89.50 high. The fact that dollar weakness occurred despite a flat Tuesday close in the Nikkei underlines the prevalence of the sell-USD status quo, which was magnified earlier by hawkish comments from the RBA. But its time for a corrective bounce again.

Current price action suggesting unsustainability of further USD weakness reflected in the lack of follow-through in EURUSD, and GBPUSD, as market remains unwilling to close at its intraday highs (trend of past 7 sessions). Throughout last week, we addressed the failure by these currencies to close at or near their intraday highs, a recurring trend that began to suggest unsustainability in these rallies.

Thus, the equivalent of the 77.90 support in the dollar index translates roughly to $1.4320 in EURUSD resistance, $1.6570 in GBPUSD resistance, 0.8360-70 in AUDUSD and 0.6650 in NZDUSD, all of which are expected to hold into first week of August. Prior to this morning's US data release we asked in our Intraday Market Thoughts (08:30 ET) "If equities hardly managed a rebound despite a sharp increase in US new home sales, then what would they do in case of renewed decline in S&P/Case Shiller home price index and US July consumer confidence". Indeed, consumer confidence slumped to 46.6 in July, even at a time of rallying equities. We remind that the June 30th release of the June consumer confidence coincided with the intermediate peak in equity indices before a 6% decline occurred in the ensuing 2 weeks.

How Much Beyond Parity in S&P500/Gold Ratio?

One week after the S&P500/Gold ratio rose to parity, the equity index has garnered further ground to hit 1.03, its highest level since January. The daily chart below shows the rising S&P/Gold ratio to be a result of the superiority of equities vs metals in March. But as the Fed began purchasing US treasuries in April, inflationary concerns stemming from a potential debasement of the US currency prompted capital into metals. The broadening advances in global risk appetite of the past 4 months have prompted gains in both gold and equities, leading to a consolidation in the equity/gold ratio.

The only viable means for the equity/gold ratio to regain its 2008 highs (S&P/Gold regains 1.10), would be for the Fef to begin withdrawing liquidity (exit strategy via selling back treasuries) without upsetting equity markets. At the present macro juncture, this is highly unlikely for at least the next 2 months. Only when unemployment has shown clear signs of peak and GDP growth emerges from slowing decline to positive growth, would a rally in equities be sufficiently strong to overcome a tighter monetary policy.

For now, with equities being overstretched in terms of valuations and nonsupportive macro climate (excessive emphasis on cost-cutting rather than revenue growth), a gradual retreat in stocks and metals is the more likely course into end of Q3. But the ensuing retreat in gold may not breach below the 880 level considering the escalating fiscal imbalances in the US Federal Govt as well as the individual States. Thus, we expect the recent ascent in equities relative to gold to be nearing its peak, without exceeding 1.05 in S&P500 / Gold, 9.5 in Dow30 / Gold, 1.7 in NASDAQ100 / Gold and 4.8 in FTSE 100 / Gold.

For a multi-year study on the 40-year cycles in Equities/Gold ratio, see our Forex & Intermarket Dynamics Workbook

By Ashraf Laidi
AshrafLaidi.com

Ashraf Laidi is the Chief FX Analyst at CMC Markets NA. This publication is intended to be used for information purposes only and does not constitute investment advice. CMC Markets (US) LLC is registered as a Futures Commission Merchant with the Commodity Futures Trading Commission and is a member of the National Futures Association.

Ashraf Laidi Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in