What Are The Currency Markets Telling Us?
As the US economy drives the global business cycle, it is important that investors who are focused on the US markets
monitor the performance of global markets in order to confirm the direction of
the US economy.
The relative performance of certain currencies can be very telling of how
well the global economy is performing. One of my favorite measures of broad
economic cycles is the performance of the Australian dollar versus the Swiss
franc–which can be determined by multiplying the Australian vs. US dollar rate
(.7053) by the Swiss franc vs. US dollar rate (1.3132). The reason is that
Australia is a large producer of commodities, and, therefore, its currency
appreciates in value as its exporters repatriate the proceeds from sales of
natural resources. On the other hand, Switzerland is naturally poor in raw
materials and needs to import these goods during economic up-cycles.
There is a very strong historical correlation between the performance of the
S&P 500 and that of the Aussie/Swiss. As can be seen in the
chart below, the currency pair recently broke through key technical resistance
levels and continues on its upward trajectory, which, in my view, not only
confirms that US economic growth is for real but also suggests that the gains in
the stock market are justified.
