Stronger Dollar and Buybacks

The forex market doesn't follow patterns that you see in the stock market, which makes it less predictable.  There tends to be overshoots when there is a long term trend and that is what happened in January.  It is one of the main reasons that I don't trade it, because the short term movements often go counter to how you would see stock or bond traders position ahead of key news and events.  Also, the reaction to economic data or to central banks is also often counter to what many would expect.  

For example, last week, the Fed emphasized symmetry in their inflation target, implying that the Fed will not rush interest rate hikes due to inflation meeting their 2% target.  Also you had the nonfarm payrolls on Friday come in below market expectations.  So what happened?  The dollar initially dipped but then rallied after the FOMC announcement, and is rallying after the nonfarm payrolls report.  This after already rallying into the FOMC announcement for the past week, going from 1.24 to below 1.20 over the past 3 weeks ahead of last week's events.  And the dollar rallied anyway, despite the Fed being more dovish than expected and despite weaker than expected jobs numbers.  That is why I don't trade forex.  

Back to stocks.  Despite the stronger dollar, the SPX is higher again, around 2680 as I write.  Odds favor the dollar rally to stall out here around EURUSD 1.19, as that is near the top end of the range in late 2017, and I don't expect the Fed to be able to do as many rate hikes as the market expects.  I usually don't even pay attention to the FX market, but the recent dollar strength has turned the SPX into a global equity index laggard, so I have been watching the dollar to see how tight the correlation is.  

Friday and today, the SPX has been able to rally despite a strengthening dollar, which is a sign that the corporate stock buybacks are coming in hot and heavy, now that earnings season is mostly over, with AAPL leading the way.  I don't think stock buybacks will be a longer term driver for this market to go higher, but after the cash repatriation earlier this year and the dip from January, it is definitely a positive catalyst for stocks in the next few weeks, when buyback flows should be heaviest.  I will try to ride this buyback wave so I can dump stocks a bit higher than here, probably sell at 2710-2720.  

Bonds look like they have found a floor right about the 3% yield area, as Powell seems to have blinked and global economic data is coming in weaker.  There is limited downside with moderate upside for the next few weeks.  10 year yield should trade down to 2.80% yield support by the second half of this month.