The US equity market is due for a pullback and this could support the dollar as an inverse correlation, in which the two assets tend to move in opposite directions, is intact, a Switzerland-based currency manager said. Over the past few months, the dollar has tended to rise when stocks retreat as investors see the greenback as a safe store of value in times of market stress.
The link, although somewhat weaker, is set to stay for some time. "We're pretty bullish on the dollar over the medium-term," said Mikkel Thorup, chief investment officer of Capricorn, which manages assets of about $280 million. "We believe the equity market in general is over-stretched and there will be a correction very soon," he said. "There's not an awful lot of buying going on.
There's still a lot of money on the sidelines that's not willing to actually go in and buy at these current levels." The S&P 500 has rallied more than 50 percent since it hit a 12-year low in early March as the United States appears to be emerging from its worst recession since the 1930s.
There are concerns that the rally is overdone and that stock prices may have run ahead of fundamentals. The recent sell-off in China's Shanghai composite has reminded investors of significant risks and uncertainty facing the global economy and financial markets, Thorup said. "Everybody is talking about China in terms of growth," Thorup said. "We've seen some pretty steep corrections already in China.
(That) should definitely have an influence on the US equity market." He expects the dollar to climb to around $1.33 and $1.34 per euro by the end of the year. On Friday, the euro last traded at $1.4337, little changed on the day. While the global economy may have hit bottom, the recovery is likely to be slow as banks are still reluctant to lend, consumer spending remains weak, and unemployment stays near 10 percent in the United States, Thorup said.
"Just in March, everybody was talking about a doomsday scenario. Then five months after, everything is really looking fantastic. That's what I just don't understand," he said. "I think we're going to have a prolonged period where we'll actually see the markets (and the economy) moving not too far away from the bottom. I think we can call that an L-shape (recovery)."
STABLE SWISS FRANC The currency manager expects the Swiss franc to be "relatively stable" against both the dollar and euro, noting that the Swiss National Bank is "very strong on the intervention side." Switzerland's solid fundamentals have supported the franc, but the risk of intervention has limited the currency's upside. Earlier this week, SNB board member Thomas Jordan said the central bank does not accept a further appreciation against the euro. On Friday, the euro slipped 0.2 percent to 1.5155 francs, while the dollar fell 0.2 percent to 1.0568.