Beware of the interaction between the currency and stock markets

The US Dollar (USD) had a strong year against most of the world’s currencies. In this article, we explain this move and its impact on global stock markets. The rise of the US dollar coincided with economic weakness in many foreign countries during the time when the US Federal Reserve raised interest rates, which in turn increased demand for US Treasury bonds and the US currency. Recently though, the trade-weighted US dollar (against a basket of developed market currencies) has fallen sharply due to weaker-than-expected CPI and PPI. This has caused long-term US bond yields to fall, and the US dollar with it. As shown in the DataGraph™ below, the US dollar is testing its 200-DMA, which has been above it since June 2021.

Daily Trade Weighted Dollar (against Euro, Pound, Yen, Franc, Krona, Australian Dollar), July 2021 – October 2022

Looking at the Longer-term Monthly DataGraph below, the US dollar has seen a significant rally from its 2021 lows to recent highs, gaining almost 28%. The short-term top in the dollar was confirmed by the lower highs in October and early November, and then the sharp break-down of the 50-DMA last week. Given the magnitude of the uptrend and the intensity of the recent breakdown, the dollar is likely to form a long-term top, although it has yet to break the long-term support.

per month in trade-weighted US dollars (vs. euro, pound, yen, franc, krona, australian dollar), 1993-2022

It is important to note the effect of currencies on global stock markets. The bulk of the upward move for the US dollar took place at the beginning of 2022, which coincided with a peak in many global markets. Often, the strength of the US dollar leads to a relative underperformance of foreign stock markets, especially emerging markets. This is exacerbated for US-based investors who hold foreign funds, as US dollar-based ETFs take a hit from the dollar’s appreciation. The recent period of US dollar weakness (2002-2007) coincided with strong global market performance (in US dollar terms) and this was particularly true in emerging markets. So, the dollar’s rise helps the relative performance of the US stock market.

Year-to-date and through the recent dollar peak, the damage to other currencies has been extensive as shown in the table below; Some of the hardest hit people lost between 8-20% year-to-September. The only major currencies that were relatively unharmed were the Brazilian real and the Mexican peso.

The combination of domestic stock markets peaking in late 2021 followed by a currency depreciation against the US dollar has led to these foreign stock markets down an average of 25% year-to-September in US dollars. The only markets (which use popular ETFs as proxies) that have not fallen by at least 20% are Brazil, India, Mexico and Thailand as shown in the table on the next page.

Changing stock markets and selected global currencies from outside the US, from 12/31/2021 to 9/30/2022

However, the past six weeks have seen a major turnaround, with USD-traded forex ETFs surging sharply as the oversold major stock and forex markets strengthen.

Selected world currencies against the US dollar, from 9/30/2022 to 11/17/2022

A good proxy for non-US stock markets is the Vanguard Total Intl Stock Index ETF (VXUS).
). It responded to a weaker US dollar and rose nearly 15% from its September low, doing relative well against the S&P 500.

However, although VXUS has attempted to bottom before in relative terms, it has not been able to break the more than decade-long downtrend of lower relative strength (RS) lows against the S&P 500. Whereas US ETFs The current previous one did not. Existing prior to 2008, the last time global markets maintained an outperformance (longer than 2-3 quarters) versus the US, was during the USD bear market and broad rally outside the US from 2002-2007 (see monthly USD chart above).

Vanguard Total International Stock Index ETF, December 2015 to September 2022

At this point, it is too early to call for a repeat period of sustained outperformance of overseas markets and US dollar weakness. In fact, the global and foreign exchange markets still have a lot more to prove than the long-term US and US dollar market. For now, the odds remain against the US dollar and the stock market continuing to perform. But, if we look at ways to invest in that potential, we’d love for International Markets to be a leader in this short-term rally around the world. Specifically, these include Italy, Germany, France, Korea, South Africa, and Mexico. These markets are up 15-25% in USD over the past 6 weeks and are either above the 200-DMA or testing from the downside.

Focus on the performance of foreign exchange traded funds, from January 2022 to November 2022

Some of the major topics that have helped overseas markets lead in the short run include luxury goods in France and Italy; industries in Germany and Korea; banking and real estate in Mexico; and retail in South Africa, among others.

Other markets to consider include Japan, which hasn’t picked up recently but has a strong breadth of performance in the capital equipment, consumer cycle, and technology sectors; India, which is also a lower rise but a long-term world leader with strong participation from the technology, basic materials, financial and consumer sectors; and China/Hong Kong, which has been in one of the stock market’s sharpest bears and for much longer than most. This market is beginning to show the emergence of new leadership in the Healthcare, Capital Equipment and Consumer Cycle segments.

If there is one clear winner from the decline in the US dollar, it is global industries. The iShares Global Industrial ETF (EXI), which seeks to track the S&P Global 1,200 industry sector, is a great way to track the overall acreage. It is 55% weighted to the US market, but this is significantly less than the weighting of global indices across all sectors in the US. It contains holdings from 18 country heavyweights in aerospace/defence, machinery, construction products, construction, outsourcing/recruitment/market research, miscellaneous operations, electrical equipment, pollution control, airlines, logistics, and ships/rails. From the weekly data below, the sharp relative performance over the past two months (coinciding with the top of the US dollar) is quite evident, as the RS line (against the S&P 500) hit a YTD high this month. The sector is well above the 40-WMA and is nearing a peak test in August driven by strength in the US, UK, Japan, Germany and France, among others.

iShares Global Industrials ETF, December 2015 – September 2022


While we still recommend that investors acquire the majority of their equity investments in the United States, we want to remain alert to potential trend changes toward overseas markets. In this regard, we will be watching the recent relative weakness in the US dollar and stock market for signs that it is time to take a more aggressive stance abroad. We’ll also be watching for more clues about what might be joining Industries as the next broad area of ​​leadership.


Director Kenley ScottResearch Analyst William O’Neil + Co. , Incorporated

As the firm’s global sector strategist, Kenley Scott presents and writes his view of the weekly sector highlighting Global Sector Strategy, which highlights emerging thematic and sectoral strengths and weaknesses in 48 countries globally. It also covers the global energy, basic materials and transportation sectors and holds a Series 65 securities license.

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