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August 8, 2018

How To Understand That The Dollar Growth Is Running Out Of Steam?

How To Understand That The Dollar Growth Is Running Out Of Steam?

Dollar and gold price correlation may be key signal for next dollar move


The index of the American dollar has closed a yesterday’s trading session on a highest level since the beginning of this year. Following the results of Monday, the Index of dollar (DXY) has reached 95,36 points, highest since July 2017. Since February 2018 the dollar advanced by 7,5% against the main world currencies.

Achievement of local tops became possible thanks to decline of yuan and pound sterling. But euro is fiercely struggling for the current levels and doesn’t want to fall lower than 1,15 to dollar. Meanwhile, DXY managed to take hold above the line of the descending trend that opens the road for further ascension.

The index of dollar strongly correlates with the price of the gold for a while. At the moment of correction in the market of precious metal, DXY goes up and down. For its part, the gold depreciates, as the situation at world stock markets, especially in the US, is moving in a promising direction, so market players have no need to buy safe heaven assets. To determine whether US currency strengthening is over, we need to monitor the gold price.



Negative Dollar and gold price correlation, possibly due to US inflation concerns. Source: Bloomberg


If gold passes to growth, then DXY will pass to correction. The index of dollar has potential for growth. First, since July Fed has increased the volume of the sold papers from its balance. Secondly, in September, most likely, the rate will be raised. Third, ECB will stop printing money by the end of the year, what makes euro more fragile to dollar. Besides, the stock markets of the USA remain stable, despite the warning of imminent downfall, thus attracting foreign capital.


Who will play a supportive role in the US stock markets activity in August?


The American investors have preferred not to do any serious actions in July — their activity in the stock market remained abiding. Ordinary investors bought securities, but did it with the same wish, as in June. Investor Movement Index counted by TD Ameritrade remained at the same level, as in the first month of summer — 5,45 points.


Investor Movement Index 1

Investors movement index. Source: TD Ameritrade


Thus, the summer activity is still 37% lower than in December of last year when the Index has set a record in 8,59 points. Nevertheless, even without purchases of ordinary investors US stock markets have odds to continue the ascension. Prices of shares can be potentially supported by buybacks. Goldman Sachs counted, that August is the most active period of share buybacks from the market. On average, 13% of all annual volume account for the last month of summer. The American stock market, unlike many other world competitors, is directly focused on shareholders. This is the only stock market growing throughout so long period.


Distribution of buybacks by month

Distribution of corporate buybacks by months. Source: Goldman Sachs Investment Research


That’s why, the culture of buybacks with a view to increasing share prices for the owners of companies is high-level in this country. When the market left buyers, corporations which annually invest hundreds of billions of dollars in securities, come to the rescue. Bearing in mind, that the profit of the companies in the current year is near historical highs, voluminous buybacks would be pursued, so it will be difficult for “bears” to drop its cost.

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