Beware of the interaction between currencies and stock markets

The US dollar (USD) has had a strong year against most of the world’s currencies. In this article, we explain this move and its impact on global stock markets. The US dollar’s rise coincided with economic weakness in many foreign nations during a period in which the US Federal Reserve raised interest rates, which in turn fueled demand for US treasuries and US currency. Recently, however, the trade-weighted US dollar (against a basket of developed-market currencies) has fallen sharply due to weaker consumer price index and producer price index results. planned. This caused long-term US bond yields and the US dollar to decline with them. As shown in the DataGraph™ below, the US dollar is testing its 200-DMA, which has remained above it since June 2021.

Daily Trade-Weighted USD (against Euro, Pound, Yen, Franc, Krona, Australian Dollar), July-2021 – October-2022

Looking at a longer-term monthly DataGraph below, the US dollar has seen a substantial increase from its 2021 lows to recent highs, appreciating about 28%. The dollar’s short-term high was confirmed by lower highs in October and early November, and then by a sharp break-down of the 50-DMA last week. Given the size of the rally and the sharpness of the recent slump, it’s possible the dollar is forming a long-term high, although it hasn’t yet broken long-term support.

Monthly trade-weighted USD (against euro, pound, yen, franc, krona, Australian dollar), 1993 – 2022

It is important to note the effects that currencies have on global stock markets. Most of the USD’s upward movement began in early 2022, which coincided with a spike in many global markets. Often, the strength of the US dollar translates into relative underperformance of overseas equity markets, especially emerging markets. This is compounded for US-based investors holding foreign funds, as USD-based ETFs are hurt by the rising dollar. The last multi-year period of US dollar weakness (2002-2007) coincided with a strong outperformance of the global market (in USD terms) and was especially true in emerging markets. Thus, the rising dollar helps the relative outperformance of the US equity market.

Year-to-date (YTD) and during the dollar’s recent peak, the damage to other currencies has been widespread, as shown in the table below; some of the hardest hit have lost between 8 and 20% year-to-date in September. The only major currencies relatively unscathed were the Brazilian real and the Mexican peso.

The combination of the peak in local equity markets in late 2021 followed by the depreciation of the currency against the US dollar resulted in these foreign equity markets falling by an average of 25% from the beginning of the year through September in US dollar terms. The only markets (using popular ETFs as a proxy) not down by at least 20% were Brazil, India, Mexico and Thailand, as shown in the table on the next page.

Selected Non-US Global Currencies and Stock Markets, 12/31/2021 to 9/30/2022

However, the past six weeks have seen a major turnaround, with USD-traded foreign exchange ETFs ralliing sharply as underlying oversold equity markets and foreign currencies rallied.

Selected global currencies against USD, 9/30/2022 to 11/17/2022

A good proxy for non-US stock markets is the Vanguard Total Intl Stock Index ETF (VXUS
VXUS extension
). It reacted to US dollar weakness and recovered about 15% from its low in September, performing well relative to the S&P 500.

However, while VXUS has already attempted to bottom out in relative terms, it has been unable to break the more than decade-long downward trend of lower relative strength (RS) lows versus the S&P 500. While current ex-US ETFs do not did exist prior to 2008, the last time global markets sustained an outperformance (more than 2-3 quarters) versus the US, was during the USD bear market and broad non-US rally since 2002 to 2007 (see USD monthly chart above).

Vanguard Total International Stock Index ETF, December 2015 to September 2022

At this point, it is too early to call for a new period of sustainable external market outperformance and US dollar weakness. In fact, global markets and foreign currencies still have a lot to prove against the US and US market still a long-term leader. Currently, the odds are still against the extension of the US dollar and the underperformance of the stock market. But, as we look at ways to invest in that potential, we like international markets leading this short-term rally around the globe. Notably, these include Italy, Germany, France, Korea, South Africa and Mexico. These markets are up 15-25% in US dollar terms over the past six weeks and are either above their 200-DMAs or testing from the bottom.

Focus on the performance of the ETF in foreign markets, from January 2022 to November 2022

Some key themes that have helped foreign markets achieve near-term leadership include luxury goods in France and Italy; Industrialists in Germany and Korea; Banks and real estate in Mexico; and Retail in South Africa, among others.

Other markets to potentially consider include Japan, which has grown less recently but has strong breadth of performance in the capital goods, consumer cyclical and technology areas; India, also up less but a long-term global leader with strong participation from the technology, basic materials, finance and consumer sectors; and China/Hong Kong, which has been in one of the more severe equity bear markets and for much longer than most. This market is starting to show the emergence of new leadership in the Health Care, Capital Equipment and Consumer Cyclical sectors.

If there is one clear winner of the US dollar pullback, it is global industrialists. The iShares Global Industrial ETF (EXI), which seeks to track the S&P Global 1,200 Industrials sector, is a great way to track the overall space. It is weighted 55% to the US market, but this is substantially less than the US weighting for global indexes with all sectors. Contains holdings from 18 countries with large weights in Aerospace/Defense, Machinery, Building Products, Construction, Outsourcing/Personnel/Market Research, Diversified Operations, Electrical Equipment, Pollution Control, Airlines, Logistics and Ships/ railways. From the weekly DataGraph below, the strong relative performance over the past two months (coinciding with the US dollar high) is quite clear, with the RS line (against the S&P 500) hitting a year-to-date high this month . The sector is well above its 40-WMA and close to a test of its August peak led by strength in the US, UK, Japan, Germany and France, among others.

iShares Global Industrials ETF, December 2015 – September 2022


While we still recommend investors keep the majority of their equity investments in the US, we want to remain alert to a possible shift in the trend towards overseas markets. In this regard, we will be monitoring the recent relative weakness in the US dollar and the equity market for signs that it is time to take more aggressive positions overseas. We’ll also be keeping an eye out for more clues about what industrials might join as the next broad area of ​​leadership.


Director Kenley ScottResearch Analyst William O’Neil + Co., Incorporated

As the firm’s Global Sector Strategist, Kenley Scott lends his perspective to weekly industry highlights and writes the Global Sector Strategy, which highlights the strengths and weaknesses of emerging themes and sectors in 48 countries around the world . He also covers the global energy, basic materials and transportation industries and holds a Series 65 securities license.


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