China, Shutdown, Evans Contribute To Dollar's Pain

Global trade has an enormous impact on both the financial markets and worldwide economy. Therefore, when the currency that serves as the guidepost for valuing assets drops 1%, it impacts investor decisions across all asset classes. Thursday's tone was set in the currency pits as the U.S. Dollar Index (UUP) dropped more than 1%, which is a big move for a currency (see upper right corner in chart below). This week UUP was also turned back at a logical point of resistance (see line A), which provided further support for a weak-dollar friendly allocation.

Bad News Means More Stimulus

The Federal Reserve respects the impact of the dollar's value on emerging economies. An economic warning from China not only increased the odds of additional Chinese stimulus, but it also increased the odds of a Fed taper "push back". Stocks like the idea of postponing the tapering process. From Reuters:

China's exporters face a difficult time in coming months as demand from emerging markets slows, the Chinese trade ministry warned on Thursday after the latest trade data showed sales to Southeast Asia slowed sharply in September. But China is ready to take measures to support its exporters to ensure the trade sector grows 8 percent this year as targeted, Commerce Ministry Spokesman Shen Danyang said, allowing exporters to see "mild growth" in the next few months.

Shutdown May Shut Down Fed's Taper

The Fed desperately wants to back away from their non-traditional forms of monetary stimulus (QE). The news from China will not assist in that cause, nor will the recent government shutdown in the United States. From Bloomberg:

The government shutdown and debt-ceiling debate prompted Fitch Ratings on Oct. 15 to put the U.S. on watch for a possible credit downgrade. S&P said yesterday the impact of the impasse was worsening by the day and had shaved at least 0.6 percent off of fourth-quarter growth, taking $24 billion out of the economy. The ratings agency forecast 2 percent annualized growth in the fourth quarter, down from the 3 percent seen last month.

Three Cheers For "No Taper"

Charles Evans added some additional fuel to the weak-dollar fire when he cited a lack of data as another reason to postpone tapering of the Fed's bond buying program: From Bloomberg:

Federal Reserve Bank of Chicago President Charles Evans, an outspoken advocate of pressing on with Fed stimulus, said the central bank should not begin reducing the pace of asset purchases as the data used to gauge the economy's health stopped during the government shutdown. "Only the data can tell us how much progress we've made and they aren't saying much right now," Evans said today in a speech prepared for delivery in Madison, Wisconsin. "The data available in September were inconclusive, and since then, incoming information has been silenced with the federal government shutdown."

Investment Implications - Foreign Assets Benefit

In Thursday's ETF analysis, evidence is presented that supports increasing demand for assets that get a tailwind from a weak U.S. dollar, including emerging markets (EEM) and foreign stocks (EFA). Casting a wider economic net, our market model told us to start buying stocks last week even with the threat of a U.S. default. Wednesday, we continued with our incremental allocation shifts by adding some exposure to the energy sector. Thursday, we sat tight holding long positions in small caps (IJR), Europe (FEZ), emerging markets (EEM), and technology (QQQ). The upper bounds of the bullish S&P 500 trend channel shown below may offer some resistance to the market's near vertical ascent.