If you go back a year ago and to speculate, what errors have made investors that come to mind their preoccupation with the idea of recession after the collapse of the S & P 500 at the end of 2018 and mistrust about the readiness of the Federal Reserve to ease monetary policy in response to the slowing economy. However, the rapid recovery of the US stock markets and "pigeon" oratory Jerome Powell changed market outlook. Stocks went up steadily, and S & P 500 2019 finished with the third best result, at least a quarter of a century. With him rose and the US dollar, which is the exception rather than the rule.
In order to manage currency non-resident, are designed to purchase issued in the United States Securities sold greenbacks using futures contracts (derivatives). In 2019 the cost of hedging were so high that many foreign investors have to give it up, and ended up in positive territory: increased not only the S & P 500, but the index USD. Lack of dollar liquidity was due to the reduction Fed's balance sheet, which eventually led to a surge in interest rates and the crisis in the money market. The central bank was forced to return to the idea of buying short-term liabilities, while Jerome Powell was against calling these operations QE.
Dynamics of the US money market rates
Source: Wall Street Journal.
Since mid-September, the New York Fed has poured into the banking system nearly $ 500 billion, the Fed's reserves increased, and the demand for liquidity has started to decrease. Indeed, by the end of December, the volume of applications for the 7-day repo fell from $ 35 billion to $ 18 billion, interest in overnight transactions narrowed to $ 28.8 billion, with the limit of $ 120 billion.
The dynamics of the Fed's reserves
Source: Wall Street Journal.
Suspend the process of reducing the balance, the Fed satisfied the money market liquidity, reduced demand for the dollar and, therefore, do everything necessary to reduce hedging costs. If the 2019 non-residents are rarely treated in these operations because of the weakness of the mass of competing currencies greenbacks, then in 2020 they surely will actively hedge currency risks. The consensus forecast for EUR / USD at $ 1.16, and before buying US stocks, European investor wants to fix the current euro exchange rate of $ 1.11 by means of a forward or futures contract.
In my opinion, the inverse correlation between the S & P 500 and the US dollar will come back in the second and fourth quarters of 2020, which would deprive greenbacks such trumps as the US stock market rally. In this case, the slower growth of the latter compared to global peers will testify outperformed global GDP of US gross domestic product, which is a "bear" factor for the index USD. Indeed, if during 2018-2019 there was a divergence between the S & P 500 and the Shanghai Composite, the dollar was feeling very confident. On the contrary, the news that the Chinese industrial profits in November rose at the fastest pace in 8 months (+ 5.4%) was the catalyst for the stock market rally China and allowed the quotations EUR / USD rise above 1.11.