The reaction to last Friday’s better-than-expected June jobs report was decidedly positive for at least three assets reflecting growth; stocks, bond yields (and interest rates) and the dollar all jumped on the news. On the chart below I drew all three assets and the resulting picture speaks for itself. Stocks, bond yields and the US dollar are all not only higher since last Friday but have staged significant year to date rallies. More precisely, 10 year Treasury Note yields are higher by 50%, stocks as represented by the S&P 500 are up almost 15%, and the dollar index is close to 5% higher. Through this lens, what the picture represents is a notable increase in economic growth expectations.
On the flip side, corporate bonds (credit), high yield bonds, and commodities are all significantly lower for the year. See the chart below.
Why am I pointing all of this out? For one, I believe to understand the bigger picture and current market structure one must be aware of the cross asset/inter-market relationships and crosswinds. Second, and more to the point of this article, the relative strength of the US dollar influences all of these asset classes to some extent.
In terms of the US Dollar index as represented by the PowerShares US Dollar Index Trust (UUP), the index has been in a decided down-trend since government-sponsored bailout programs were unleashed in 2009 (note red arrow). Since August 2011 however, when the dollar index bottomed, it has been trading in a much more promising formation that is now again bumping up against a resistance line (upper orange line), for the second time this year.
Closer up on the daily chart of the PowerShares US Dollar Index Trust (UUP) note that the recent rally off the June lows has almost matched the extent of the February – March rally, albeit at a much steeper slope. Considering the almost vertical leap in the dollar index over the past couple of weeks it is thus unlikely that a breakout past the May highs would stick. Rather some backing and filling would be in order before then tackling this breakout, which as discussed above, would be of great importance on the longer-term charts as well.