Another divergence Kicklighter points out is the dollar is a safe haven. While that always will be the case, he points out that its correlation with the S&P has built in 2013 despite a strong equity rally with low volatility (see “Safe haven or risk asset?” below).
He says the dollar will get to 90 by year end but not go beyond it. “To make the transition, you have to have extreme risk aversion and the dollar is already essentially at a three-year high so a lot of the taper concern has been priced in. … but I don’t think you will get beyond 90 until you have the conversation that you are moving beyond stimulus.”
And therein lies the rub because as the U.S. central bank is debating when to take money out, others are looking to add more stimulus.
“You are talking about the Fed at the crest of its stimulus program while the Bank of Japan just recently hit the accelerator, so they are at different phases of their programs,” Kicklighter says.
And it is not just the yen. New Bank of England Governor Mark Carney is making noise that the BOE will add stimulus soon, as is likely with the European Central Bank (ECB) and the Reserve Bank of Australia.