As discussed in USD as a Systemic Pressure Point, a weaker USD has helped catalyze a global asset rebound. A Bloomberg News’s headline today reads: “Weaker Dollar Sparks Commodities Rally; U.S. Stocks Edge Higher.”A weaker USD takes pressure of Emerging Markets, especially China and commodities producers. In Fig. 1 below we show the negative correlation of the USD Index against most global assets (red links), and simulate a -3σ shock of USD and highlight biggest beneficiaries. The top time series shows that even European equities correlation turned significantly negative against USD in march.
Fig. 1 Cross Asset FNA Correlations -3σ USD predictive stress test
While the broad USD Index trend is down, we have started to observe some negative outliers in EUR and CHF vs USD recently. Yesterday CHF/USD surprised for second time outlier since 12 April.
Fig. 2 FNA Correlations highlighting CHF/USD negative outlier (95% Confidence Level)
It’s worth monitoring continued developments in the FX landscape as a key driver of behind the global asset rebound. Central bankers around the world are likely to encourage a gradually weakening USD for the time being, especially against Emerging Markets currencies.