Dollar Index View - 07-Oct-2011

Dollar Index & It's Negative Correlation (Inverse Relationship) to Indian Markets 

Foreign funds influence our Equity Index movements in a big way. That is if they start investing then the stocks move up & if they start pulling out money the stocks keep going down. 

This movement can be tracked effectively by keeping a close tab on US Dollar Index.

US Dollar Index is an Index of value of United States Dollar (USD) relative to basket of currencies. The Basket of Currencies and there weightages are shown in the below chart.

EUR: Euro, JPY: Japanese Yen, GBP: Great Britain Pound, CAD: Canadian Dollar, SEK: Sweeden Krona,  CHF: Switzerland Franc

Dollar Index gains or falls when USD appreciates/depreciates against these basket of currencies respectively.

In the recent past a lot is happening in the Euro Zone related to high probability of Greece defaulting on its Bonds, also situation is looking grim for other European Union nations of Spain, Italy, Ireland, Portugal & Belgium. During such times a flight for safety is happening and there is a fresh demand for USD as a Safe haven, although inherently US itself is in a double dip recession scenario. 

What it means for us? In Dollar Index Euro has highest weightage of 58.6% so any more problems in Euro zone would weaken Euro, thereby strengthening USD. If USD strengthens, Dollar Index would appreciate. 

Dollar Index having inverse relationship with Indian Equities would mean Equities falling more with Dollar Index rising & vice-versa.

3 Year Dollar Index Weekly Chart

The chart is self explanatory. In March'09 Indian indices & majority of large-cap, mid-cap, small-cap stocks bottomed out & ventured into a fresh round of upward journey. During that time the Dollar Index was at its peak around 89. 

After a steady consolidation around 72-75 for four months from Apr'11-Aug'11. DXY (Dollar Index) has broken out & in a fierce rally has managed to close above its 50 Week EMA & now knocking on the doors of 200 Week EMA. A cross above 200 Week EMA would make it more stronger. Immediate resistance would be faced at 200 Week EMA & next resistance at its previous peak of 81.44.

Indicators:

MACD: Still in Buy Mode with Strength increasing.

RSI: Above 60 & moving up, Indicating the strength in the ongoing rally.

ROC: Positive and around 4%, indicating the Momentum is still strong in the move.

A close above 79 levels and a rally towards 81 would mean Indian Index (NIFTY) would breach 4700 on the downside & move lower. Keeping a close watch on this would give a better view of the times ahead & how Index would move.


Bottom Line: Looking at the Price, Indicators, Moving Averages & the situation in the Euro Zone - Probability of Dollar Index  going up is higher than correcting from here.

Market Wisdom: A security is said to be in an Uptrend, if the price is above its 50 Period Moving Average & which in turn would be above its 200 Period Moving Average. 

A security is said to be in an Downtrend, if the price is below its 50 Period Moving Average & which in turn would be below its 200 Period Moving Average.

*EMA - Exponential Moving Average

Happy Trading / Investing. Would be glad to receive comments from all on the views expressed.