[Benjamin]

A Stronger U.S. Dollar Will Crush The Reflation Trade
By Michael Kramer, Mar 26, 2021, https://www.investing.com/analysis/a...rade-200569663

The dollar’s gains have come as rates in the US have risen sharply in recent weeks as the prospect for better growth takes shape in the US, even while parts of Europe struggle to recover from the coronavirus pandemic. Thus, commodities prices have been hit hard, as they are negatively affected by the strong US currency and worries of weaker growth hurting demand.

This weakness has found its way into the reflation trade, with sectors like Energy, Industrials, and Materials seeing weakness this week. If the dollar continues to strengthen and global growth concerns persist, it could signal the end of the reflation trade.

Additionally, emerging markets have been hit hard in recent trading sessions due to the stronger dollar.

There is potentially a bearish pattern forming in the EEM ETF, known as a head and shoulders pattern.

{EEM ETF = iShares MSCI Emerging Markets ETF (NYSE:EEM)}

Banks May Falter Too
The bank stocks have also come under pressure. This despite yields stabilizing at higher levels and spreads widening. The group has rocketed higher, and at least over the short-term, is trading well ahead of itself.

Just this past week there have been increases in the put position for the Financial Select Sector

Reflation Trade Finished?
If the dollar continues to strengthen, it will further weaken the reflation trade, causing a ripple effect through different parts of the equity market. Coupled with higher interest rates that have negatively impacted the technology sector too, the equity market could find itself in trouble.

If rates begin to ease and the dollar drops, it will allow for the reflation trade to resume, pushing stocks in those sectors to even higher levels. But in the absence of a reversal of the dollar or interest rates, the reflation trade could be over. That is likely to be terrible news for the rest of the equity market.