gwcharts

US outperforms EU in absolute terms when $ rises against €

EWG/SPY  
EWG/SPY  
Thesis: US markets outperform EU markets in absolute terms when $ rises against             .
EWG/SPY (Germany ETF/SPY both in $) vs EURUSD             (red line)

I've read many opinions on what happens to US stocks (versus EU stocks ) when the dollar rises. Usually people say a strong dollar is bad for US exporters as their revenues will fall and labour costs will rise. Similarly they say a weak euro             is good for EU exporters as their foreign revenues rise and labour costs fall. And comparisons are often made between national indexes, which take no account of currency, and are thus pointless IMHO.

So this chart shows that the common sense view is completely wrong. It compares EWG             (Germany ETF in US$) divided by SPY             - which I'm using as a proxy for EU outperformance over US - and EURUSD             . As you can see, they are very strongly correlated.

In other words when the $ started strengthening in 2008, the US indices started outperforming the EU indices . And in the previous cycle, when the dollar started weakening around 2002             , and the euro             strengthened, the EWG             outperformed the SPY             . And in the cycle before that, which ended around 2001/2003,             weakness again correlated very well with EWG             weakness.
DanV MOD
2 years ago
Hi that is an excellent observation I think. Thanks for sharing.

Many fund managers likewise have debated ie economic 101 that says if strong currency will be countered by weak stock market. IN the case of YEN previously they had strong currency and relatively strong stock market.

My take on this is that in sea change of money flow, strong stock market would attract new money and feed back rule.

Your charts confirms that this could be an important factor.

Also in recent time YEN weakness and now EUR weakness as major economic blocks has results in strong USD & strong stock. If that was to halt or reverse it could suggest possible money could start to leave US shores and resultant correction of drop in the stock market and USD could be significant.

In fact in addition to your above chart if you were to plot a ratio chart of the 2 you will find it very useful by applying normal Technical Analysis approach in possibly finding potential turning points in ratio chart harmonising with actual price charts.

Thanks again.
+1 Reply
gwcharts DanV
2 years ago
Thanks for the comment. I have no way of knowing but I would tend to agree with you on the reason why this occurs. I live in euroland and for us, for the last few years, it has been a no brainer keeping money in US trading accounts. When you keep $ cash your balance in euro rises, while your stocks tread water, your balance in € rises, and when stocks rise your balance in euros rises.

For example, so far this year my port is up c. 6% in $ and 16% in euros. And up a staggering 50% over the last year or so. Meanwhile cash left in euroland accounts, or worse still in EM stocks have been disastrous. When the dollar turns - and it usually moves in 7-10 year cycles - that is a lot more problematic for us in euroland. It means even when you sell stocks in your dollar account and go to cash, unless you hedge, you may still "lose money" by simply being in dollars. Since moving currencies and hedging is very expensive, you tend to move money into accounts with rising currencies. And then buy stocks in those accounts.
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DanV MOD gwcharts
2 years ago
I agree. That is rather difficult issue to address unless as you say you hedge or on a lager anticipated more consider partial hedging using long term far out of the money hence relatively cheap Options.

Nevertheless still difficult to fully manage.
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