May 2012 Dollar Action Will Give Clues On Global Sentiment For U.S. Equities:
Watching the dollar for global sentiment.
We were intently watching the dollar last week to give us clues about how global sentiment had changed. Dollar denominated assets scored well this week as the dollar index popped and the euro flopped. The financials were beneficiaries of the strong dollar last week but this momentum may decline in the short run from overextended levels.
The UUP exchange traded fund rose sharply last week and broke out of its range as Greece exiting the euro common currency became a closer reality. We believe preparations for countries leaving the euro are currently under way and member nations are creating contingency plans.
Long run, Europe will be better off when nations that spend and don’t grow are punished by capital flight. From the beginning it seemed like the euro was a bad idea and became overpriced immediately which inflated staggering economies in the region unnecessarily giving them the gumption to spend even more.
We are looking for a short term breakout up or down in the dollar and a continued decline in commodities prices.
The UUP index is close to a new 6 month high and could push through resistance levels or break based on news from Europe. As banks in Greece and Spain work to get more liquidity, expect movements in dollar exchange prices to reflect a coupling effect of negative sentiment that can only be alleviated by a broken euro. We won’t evaluate demand for stocks and short-run trader appetites for U.S. equities without checking the dollar first.