Is the Force with risk assets?

COVID, inflation, deflation, global growth prospects, interest rates and a bunch of other things that I could probably write a book about, all worry me. However, all the above aside, the thing that mostly worries me above all others is the value of the dollar.

Taking a cue from Star Wars, the dollar is something like the force. When there is balance in the force, things work ok, and the galaxy is peaceful. But when there is a disturbance in the force, then all hell breaks loose.

Similarly, when the dollar’s value is balanced, the global economy is growing, and things are moving alone ok. But when the dollar becomes strong, then things don’t work so well. A strong dollar means there are fewer dollars available for the global economy to function properly. It also means companies and countries that have dollar denominated debts must pay more. But it might also mean a headwind for US companies that rely for a big portion of their profitability from global markets.

A higher dollar might also mean market participants are buying dollars as a safe haven trade. And every time this happens, it does not fare well for equities.

So, if we look at the chart above, one can probably say that as long as the EURUSD pair remains above 1.17, risk assets should continue to do well. But if the pair falls and remains below 1.17, then chances are we might see correction.

On the other hand, if we see the pair above 1.22, then chances are risk assets will continue to perform well, and we might see a strong upward move in equities.

The bottom line is that there are countless things that worry me, and countless things that can cause a correction in the equity space. However insofar as the dollar, if it remains at current levels, it will be one less thing to worry about. And if we see the EURUSD pair above 1.22, then we can say with a little more confidence that the Force will continue to be with risk assets.