USD Dollar XEU Euro FXY Yen SPX Daily Charts Currency Effects

The markets are twisted up in knots from the central banker intervention. The 10-year Treasury yield remains under 1.70% showing a strong interest remaining in notes and bonds despite the higher stock market. There is no rotation from stocks to bonds. The Fed and BOJ, and perhaps this week the ECB, central banker easy money is pumping the equity markets higher.  The dollar started its launch as February began moving from 79 to over 83 in two months time. As expected, copper, oil and commodities in general were hit. In normal markets, the broad indexes should sell off as well, however, the SPX leaked lower in February only to recover and move far higher, as the dollar strengthened. There must be some reason that the regular market relationships are breaking down (commodities should have dragged the SPX lower).

During February-March note the drop in the yen. The BOJ started to pound the table in February that they will run the printing presses non-stop and try to inflate their way out of the two-decade deflationary funk. The weaker yen caused by BOJ intervention is what fueled the SPX to new all-time highs.  Note that the euro to dollar inverse relationship is in tact.  The change is that the stronger dollar and weaker euro should have sent equity markets lower in February and March but did not since the weaker yen trumps all.  In April, note the bottoming and flattening of the yen movement.  The yen is starting to strengthen (not what the BOJ wants), and is strengthening on this morning's tape. This is reflected in a lower dollar/yen currency pair. Weaker yen = higher dollar/yen = higher equities and stronger yen = lower dollar/yen = lower equities, however, this relationship may be running out of gas now and the euro and dollar may reassume leadership status in relation to the equity market direction.

If the yen has ran its course for now, and moves flat or strengthens for a rebound rally, this action will hinder equities.  The focus this week is on the euro with the ECB Rate Decision on tap for Thursday morning, 7:45 AM EST followed by the Draghi press conference at 8:30 AM. The euro is moving sideways right now, just as the dollar prefers a sideways channel right now, but the euro shows a potential bull flag pattern. This pattern would play out if Draghi makes no change; the euro would move higher. But the consensus is that Draghi will do something, it is simply a matter of what. He may cut rates, or announce a stimulus package, or both, it is all a toss-up. ECB easing or stimulus action should weaken the euro. This will help the flailing European manufacturing and automobile companies.

The BOJ intervention (weaker yen) clearly saved the equity markets over the last couple months since the stronger dollar and weaker euro wanted to see the SPX drop.  The yen's effectiveness is likely waning now and the euro and dollar relationship may take the front seat again.  Weaker dollar = higher euro = higher equities and stronger dollar = lower euro = lower equities. The difficult aspect is whether these relationships will hold once Draghi provides his decision. The European markets are bullish in recent days since they already are expecting a rate cut. The weaker euro should be in concert with a stronger dollar and lower U.S. equities, however, the markets may view another central banker easing program, in this case the ECB, as a big positive that will pump all equities higher like the BOJ actions.  The new asset bubbles in dividend stocks and perceived safe havens, created by the central bankers, are already at obscene levels, simply look at the parabolic utilities sector. The projection at this writing is that the yen will move flat to up (strengthening), dollar/yen leaks lower, the euro will leak lower to the 1.29-1.30 area as the week plays out, the dollar will recover moving upwards inside the ongoing sideways channel, and the SPX sells off. The charts above clearly show how the euro to dollar to stocks relationship broke down in February-March due to the BOJ intervention (weaker yen) which caused the continuing rally in equities and new highs in the SPX. This information is for educational and entertainment purposes only.  Do not invest based on anything you read or view here.  Consult your financial advisor before making any investment decision.