March 23rd Weekly Market Update

In technical analysis, “intermarket analysis” looks at the way in which various markets interact. Intermarket analysis primarily looks at four market sectors: currencies, commodities, bonds, and stocks. From a technical analyst’s perspective, focusing our attention on only one market without considering what’s happening in the others leaves us in danger of missing vital directional clues and potential profits. The dollar, which has appreciated 24.4% since June 30, 2014, has had an unusually strong intermarket effect of late. Today, we look at the dollar’s recent impact on other major markets and what it means for investors from a technical perspective. Since June 2014, a strong U.S. dollar has created a tailwind for European equities, while creating headwinds for the euro and commodities, especially crude oil, as well as equity markets for commodity-exporting emerging market countries such as Brazil.

The strength or weakness of the U.S. dollar, as measured by the U.S. Dollar Index, is determined by the dollar’s value against a basket of major world currencies. As of March 19, 2015, the euro made up 57.6% of the U.S. Dollar Index. A strong dollar, therefore, generally corresponds to a weak euro. Technically, the U.S. Dollar Index has been operating in a bullish price trend, as represented by a positively sloping 40-week simple moving average. The magnitude of its price move higher since July 2014 may be considered substantial, reflected by a weekly 14-period relative strength index (RSI [14]) value of 74. The RSI (14) is a technical momentum indicator that compares the magnitude of gains to losses over the last 14 trading periods. For the RSI (14), any reading above 70 is considered a strong, possibly overbought, uptrend; any reading below 30 is considered a strong, possibly oversold, downtrend.

Conversely, related weakness in the price of a euro in dollars (EUR-USD) has pushed the euro into a bearish weekly price trend, as represented by a negatively sloping 40-week simple moving average. The euro’s move lower may be considered substantial, reflected by a weekly RSI (14) in oversold conditions at 27, the weakest value since May 2010. A weak euro (and strong dollar) have supported European equities, represented by the MSCI Europe Index [Figure 3, page 3], with the strong negative trend for the euro, as measured by an oversold weekly RSI (14), matched by a strong positive trend for the MSCI Europe Index with an overbought weekly RSI (14).

For the full article: THE DOLLAR’S RIPPLE EFFECT