- The USDOLLAR has become a proxy for risk-on versus risk-off sentiment.
- An increasing greenback suggests panic, whilst a decreasing buck suggests that participants are happy to take on risk.
Given the amount of liquidity and stimulus injected into the market, the greenback has become a proxy for risk. As liquidity wins out and QE is the order of the day, one may expect a declining USDOLLAR and support for the risk markets. However, if panic grips the market, the dollar appreciates and “cash is king” dominates.
USDOLLAR vs. SPX500
The left chart shows the USDOLLAR and the right chart shows the SPX500. We note that the red rectangle is the period where capital flooded into the dollar and out of the SPX500. I.e. as market participants became increasingly risk averse, the greenback appreciated and the risk market capitulated. The green rectangle shows the period of liquidity expansion – the Fed announced its unlimited QE programme on 23 march, very close to the risk market’s low.
USDOLLAR Flashes Warning
The above shows the daily chart of the USDOLLAR. It is looking to cross above its black 20-day SMA (aqua ellipse). If it does and the SMA turns up, market participants are seeking a safe haven as they become more fearful. We note that this view will gain support if the RSI moves above 50 (blue rectangle) and if the MACD histogram continues on its current trajectory (green trend line). As per the first chart above, and if the implied relationship holds, an appreciation in the USDOLLAR will be accompanied with a sell off in the risk market.