Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here.
Today’s bonus section is a quick appraisal of the U.S. dollar. The dollar has typically been strong during recessionary periods and sometimes violently strong during significant risk-off events. In 2008, the British Pound dropped from 2.0200 to 1.3600 in six months. For a major currency to decline 32% in 180 days is a gigantic move. So much so the Pound essentially consolidated for five years subsequently. It fell again to 1.2000 immediately after the Brexit vote. The currency could not break that Brexit support in the most recent bout of dollar strength and has now recovered to 1.2500+.
The EUR/USD fell from 1.2300 to 95 cents at the height of the Covid shutdown and has subsequently been consolidating between 1.1200 and 1.0500. The Euro now approaches 1.1000.
The dollar is an asset we want to own during a significant risk-off event, like a major recession. The aftermath of that event is up for debate. The Euro between 1.1000 and 1.1100 is the line in the sand regarding trend. Typically, this would be an automatic risk reversal type trade, but with the pair-threatening trend, it’s a wait-and-watch for a few days. The Yen is a different situation that’s an established trend, meeting 146 support shortly.
For educational purposes, the Real Broad Effective Exchange Rate (REER) for the United States indicates the U.S. dollar has strengthened in real terms against a basket of other currencies. This implies that, after accounting for inflation differentials, the purchasing power of the dollar internationally has increased, making U.S. exports relatively more expensive and imports cheaper for American consumers. A higher REER value typically indicates a stronger currency in terms of international trade competitiveness.
Learn more about the Market Situation Report written by Tier 1 Alpha.