Falling Dollar Creates Opportunity For Outperformance

15 Jan 2023

SPY DXY EFA

The opportunity presented by a falling dollar:

These are simple Yearly Candles. The chart depicts how the falling dollar can provide outperformance in foreign equities vs domestic equities. The top chart is simply a chart of the dollar index. The middle chart is EFA vs SPY. The bottom chart is that of the EFA. Take notice as the dollar weakens - represented in the first chart by red candles - that EFA outperforms SPY as denoted in the second chart by white candles. Since 2002 There have been 9 years in which EFA outperformed the SPY. 7 of the years have been associated with a falling dollar. One of the off years was 2005. The dollar was up, but the overall long term trend was still down. The other off year, was this past year. Even though the dollar was strong it peaked in Q4 and fell precipitately into the new year kickstarting new strength in EFA. The 9 years of outperformance generated positive returns in 7 of those years. The 2 years of negative performance were in 2002 and in 2022. Two of the worst years on record risk assets globally.

Those seven years generated returns of:
2003: 38.15%
2004: 17.16%
2005: 11.26%
2006: 23.20%
2007: 7.21%
2012: 14.80%
2017: 21.79%
Average Return: 19.08%

What is noticeable is how strong the returns can be when the dollar enters a secular decline. 2003 through 2007 was particularly outstanding. During that time the dollar fell by roughly 34%. While there hasn't been a secular decline in the dollar since then, I think it pays to keep an open mind to the possibilities.

Funds for the falling dollar: EFA VEU VEA VXUS

15 Jan 2023

Nota

All of these charts look the same. Reverse H&S breakouts with improving RSI and early signs of relative outperformance.