Could a Weak US Dollar be Good for Stocks?
The US dollar ended 2018 on a weak note and has continued to decline. Many would think this has bearish implications for US stocks, but actually, the contrary is true. A weakening Dollar could be fueling the recent rally stocks have experienced since reaching lows at the end of December. The reason a weakening dollar is good for large-cap US stocks is that when corporations convert their profits from overseas operations into Dollars they end up with more Dollars since the foreign currency is worth more. Many top technicians expect the dollar to continue its weakening which would suggest stocks could have more room to rally.
In a recent blog post, J.C. Parets, a well-respected technician and the founder of Allstarcharts, gives his outlook on the Dollar and discusses its implications on US Stocks. The line chart below represents the US Dollar Index. Parets uses this chart to explain that the Dollar hit his upside price target at the 61.8% Fibonacci retracement, and then reversed lower. It has since broken its uptrend line and is showing a bearish RSI divergence. Parets was ahead of the correction which stocks saw at the end of 2018 but now suggests that Dollar weakness is evidence stocks won’t continue to crash. In a comment to The Chart Report, Parets explained: “The Dollar ripped so much that if it kept going it was because stocks were crashing. Therefore, a weak Dollar means no crash.”
Paul Ciana is Chief Technical Strategist at Bank of America Merrill Lynch. In a segment on CNBC, he presented a similar outlook to Parets about where the Dollar is headed and what it could be signaling for US equities. He examines the currency pair of the US dollar to the Chinese Yuan. He notes that the chart is forming a bearish head-and-shoulders top pattern. Another bearish signal is that the 50-day moving average is about to death cross below the 100-day moving average. Paul’s downside price target coincides with support at the 200-day moving average. He thinks further dollar weakness relative to the Yuan should suggest a risk-on, bullish environment for US stocks. He warns that if the currency pair finds support at that 200-day moving average and reverses higher, it would signal a more risk-off bearish environment for stocks. Below, you can see the chart Paul uses to make his argument.
When we compare J.C.’s and Paul’s work, it’s interesting to see how these two technicians use two separate sets of tools to reach the same conclusion. Going forward it's going to be important to watch how the Dollar performs as a clue to how stocks might fare.