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Currencies represent the truest reflection of economic fundamentals and market sentiment. Therefore, they continue to be an important segment of the financial markets to watch.
Since the “flash crash” in the U.S. stock market on May 6, most market pundits and financial media have had their eyes glued to the euro for explanations on stock market activity.
Take a look at these headlines to see what I mean …
• Reuters: “Stocks Slide, Euro Falls After Spain Downgrade”
• Associated Press: “Stocks Slide After Euro Falls to New 4-year Low”
• Press TV: “Euro Concerns Pull Down Global Stocks”
So perhaps there’s never been a more important time to keep abreast of the …
Currency Markets and
Market Correlations
While the euro is proving a critical catalyst for all global markets, today I’d like to show you other examples of intermarket relationships that can offer important clues for the future direction of currencies.
First, take a look at this chart of the Canadian dollar and the S&P 500.
The Canadian dollar had been hovering around parity versus the U.S. dollar for much of April, prompting forecasts of much more strength ahead and an uptick in interest in Canadian investments.
But despite the improving economic data in Canada and the associated prospects for the Bank of Canada to start reversing record low interest rates, the Canadian dollar’s fate has been more intimately connected to the performance of the U.S. stock market.
So if you have an interest in the future direction of the Canadian dollar or Canadian dollar denominated investments, you should pay close attention to where U.S. stocks are headed.
Next …
It’s widely believed that emerging market economies are the place to be. “That’s where the growth will come from” experts say. And Brazil is typically on the top of the list. Also keep in mind, when the Brazilian real moves up or down, so do your investments in Brazil.
But is the performance of Brazilian markets truly a representation of the country’s economic fundamentals or is it more of a reflection of prospects for the global economy?
Take a look at this chart.
Like with the Canadian dollar, it’s clear in the chart above that the real closely tracks the movements of the U.S. stock market. When stocks go up, money flows into Brazil and its currency. When stocks go down, money flows out.
So while Brazil may have the fundamental tools in place to attract global capital, the returns on that capital, in this highly fragile global economic climate, are likely to be more explained by the U.S. stock market.
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| Global currencies tend to track U.S. stocks. |
The bottom line: The S&P 500 is acting as the key proxy of global economic health. And as global risk appetite oscillates, so does the U.S. stock market and, as a result, so do global markets.
Given the stock market declines of the past month and the elevated risk environment, these intermarket relationships suggest the performance in global markets will continue to follow the path carved by U.S. stocks.
My advice: Be aware of the external influences on your investments. A growing sovereign debt crisis and threats of a slowdown in Chinese growth represent big risks to global growth and global markets. And for cues on how global investors are digesting these risks, just watch the U.S. stock market.
Regards,
Bryan
P.S. For more in depth analysis on the currency markets and specific recommendations on how to both profit and protect yourself from the unfolding currency crisis, I’d love for you to join me in my monthly newsletter, World Currency Alert. For more details please click here.
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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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