US Dollar Likely to Rally Further if S&P 500 Declines

– US Dollar rallies sharply on S&P 500 tumbles on Goldman Sachs SEC Complaint

– Greenback stands to gain sharply on further unwind in leveraged futures positioning

– Volatile Greek fiscal crisis may likewise lead to US Dollar strength

The US Dollar finished the week roughly unchanged against other G10 counterparts, but a key surge through Friday’s S&P 500 declines leaves short-term momentum in favor of further Dollar appreciation. An SEC complaint that Goldman Sachs failed to disclose clear conflicts of interest in Subprime Collateralized Debt Obligation offerings sent the financial titan’s stock down an impressive 12.8 percent through Friday alone. Such sharp declines elicited sympathetic moves in firms such as Morgan Stanley and Bank of America, forcing the S&P 500’s Financials sub-index 3.7 percent lower through the day’s close. Whether or not the allegations prove true may matter little in the court of public opinion, and the mere accusation greatly increases the probability that financial market regulation will pass both houses of the US legislature. What this means for financial market risk sentiment is, in this author’s opinion, relatively clear.

The US Dollar stands to appreciate further if the S&P 500 and other key financial market risk sentiment barometers head lower in the coming week of trade. This is especially true against currencies such as the recently high-flying Australian and Canadian Dollars. Recent CFTC Commitment of Traders data showed that Non-Commercial traders remained incredibly net-short US Dollars against both the AUD and CAD. The leverage that typically goes into these futures positions leaves them especially susceptible to unwinds as traders receive cash calls in other leveraged securities, and it will be critical to watch the trajectory of risky assets in the week ahead.

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A comparatively empty week of economic event risk leaves the Greenback at the whims of broader financial market moves. The volatile situation surrounding Greece only adds to potential catalysts of market turmoil; as we saw this past week, the safe-haven US Dollar stands to gain on further deterioration in the Euro Zone’s dilemma. Possible exceptions may include Producer Price Index, Housing Price Index, Durable Goods Orders, and New Homes Sales reports. Nothing especially stands out as far as consensus forecasts are concerned, and it would be a stretch to claim that the US dollar would react to anything but the largest surprises in these indicators.

The all-important question remains whether we can expect further S&P 500 pullbacks. The S&P Volatility Index (VIX) saw its largest single-day advance since the sharp market corrections we saw in early February. Further deterioration in conditions and heightened fears of volatility could push the S&P 500 lower and the recently-resurgent US Dollar higher. – DR