Currency Capitulation?

All year it’s been about Dollar and rates. When the US Dollar has been strong and rates have risen, stock prices have fallen. Last week was no different. The S&P 500 index dropped 4.6% to challenge the June lows, while the Dollar index surged 3% for its best week since 2020.

Seemingly, the most important shift we need to see before we can call an end to the bear market in stocks is a softening in the forex market. So is this what currency capitulation looks like? Check out the asymptotic action in the Dollar:

The Euro dominates the index above, but Dollar strength has been broad-based. Here it is breaking out of a 5-year consolidation range against the British Pound.

Definitely the sharpest action we’ve seen since 2020.

And against the Chinese Renminbi it’s a similar story. As China continues to pursue a COVID-zero policy that’s significantly hampered their economic output (full disclosure: after two years of dodging its wrath, COVID finally caught me this weekend), the Yuan has lost more than 10% of its value compared to the USD. The exchange rate blew through a 5-year rotational area earlier this month and is on track to test the 15-year highs set in late 2019.

In Japan, the damage has been even more extreme. The Yen has lost more than a quarter of its value vs. the USD since January 2021. That puts the currency cross at levels not seen since 1998! With the latest Dollar rally, USD/JPY matched the monthly peak set more than 20 years ago. Frustrated with the developments, the Bank of Japan intervened in their currency market last week for the first time since that long-ago peak.

As the USD runs into potential overhead resistance relative to these two major Asian currency pairs, will the Dollar’s advance finally take a breather? Or will currencies continue to be a problem for stocks?

Stay tuned.

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