Increasing Capital Flow To International Equities May Lead To Dollar Fall

“Davidson” submits:

The US dollar holds near its highs, but the EFA (Large Cap Intl Equities) shows that capital is flowing to International Equities as it rises to 62.6. The MSCI All Capital World Ex-US Index (ACWX) which includes Emerging Markets is rising in tandem. One cannot predict which of the various indicators will shift prior to the others as each is dependent on investor perception. It appears that equity investors are leading the way this time.

If enough capital shifts back to International Equities, the US$ should fall back over time to its long-term trend which is 30%-35% lower than current levels. Oil, which has been tied algorithmically  inversely to the US dollar and directly correlated to economic activity since 2003by Momentum Investors, has risen ~100% from the 1Q16 lows. Market psychology is clearly recognizing that the expanding economy has not suffered the major recession forecasted by low oil prices. The continued rise in equity markets globally will eventually force pessimists to reverse their perceptions. I expect to see lower US dollar and higher oil prices going forward as Momentum Investors capitulate.

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It is impossible to judge at what specific break-point Momentum Investor market psychology may transition. The chart shows a DASHED GRAY LINE at 62 for the EFA for perspective, not as a prediction. It is a means of calling attention to a positive change vs. previous the trend. It was US$ strength on the Russian invasion of Ukraine in 2014 which impacted the EFA and oil prices. This was market psychology. Market psychology always cycles. It was global market psychology panic which drove rates to 5,000yr lows, drove the US$ strength and drove oil prices to $26BBL from $100+BBL. We are seeing the early stages of reversal today.

Investors are recommended to have International Equity exposure especially Large Cap Intl.

International Equities