One of the questions that’s come up a few times of late on the discussion boards is why the US stock market and the dollar are trading in the opposite direction from each other. This has actually been going on for a while now. No doubt folks who have picked up on the pattern are trying to think about how they can use it in their trading.
Here’s the deal.
Stocks and the dollar are mostly moving on the same trigger at the moment, the risk aversion one. When the market is scared they sell stocks and buy the dollar as a flight to safety trade. That usually also means buying Treasury debt, which is why stocks and Treasury yields have been moving in the same direction for the most part. When the market is feeling more happy and the fear has been put aside, stocks rally and money moves out of Treasury securities and the dollar.
Do not consider this any kind of permanent situation. Correlations in the markets come and go all the time. As many a quant trader found out in this cycle, even markets that are normally uncorrelated can become very correlated. It’s not a good idea to rely on these things continuing on perpetually.
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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
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