Inter Market Divergence

The overnight action in the dollar should have us thinking. Why did the dollar fall? What happened during the last Taper and does it pose any significance to what might follow here. What I observed is that bond yields went down after the last Taper and the dollar later rallied. Now when we go back to the period prior to 2008 bond yields and the dollar were more directly correlated with a small lag. So rates were cut after the Y2K crisis and months later the dollar started to fall and stimulate the economy. Normal natural expected relationship. But after QE that appears to have changed. When QE stops bond yields fall. When QE starts bond yields rise. Why? Probably because QE stimulates the stock market and when stock markets go up bond prices fall [rising rates].

In short, the chart below shows the change in the relationship between the dollar and bond yields in over 10 years. It may be an outcome of QE. Bonds yields [10-year] and the dollar index appear inversely correlated for a while. So when stocks go up bonds yields go up the dollar goes down. 

Now the smart ones out there will say that the dollar has not been falling, Yes but bond yields have not risen to a new high since March despite all the Hullallah in the media around it and around inflation. The chart is below so it's in blue and orange and surely you can see. The last time the dollar was falling yields were rising.

So what did the speeding of Taper mean for the bond market? If it means higher yields then the dollar will fall again. And US stocks? See if yields rise they will do so because of the confidence that the US economy is growing with CB support at least for now and so stocks can go up as bonds fall [yields rise]. If the opposite is true as has been for the last two weeks, stocks are falling and bonds are rising [yields falling], then the dollar rises and we are all in trouble. But that is not what the dollar signaled overnight. See my USD post some time back, the DXY has a 5 wave decline on it. The dollar does not want to rise anymore. The patterns are clear and we just need to watch which one is playing out over the next few days after all these announcements and then follow the market.

Stay clear of the noise.