When the U.S. dollar is appreciating in value and trending upward, natural gas price trends upward as well to put moderately extreme pressures on the SPDR® SandP 500 (NYSE:SPY) and Crude oil. As most energy transactions are conducted in U.S. dollars, this makes sense. Yet, with the recent agreement signed by Russia and China to conduct future energy transactions in Rubles and Yuan (Source: Nikkei Asia), will it result in more muted price trends in the future?
When the U.S. dollar rises, natural gas bullish price spikes seem to inflict greater disruption events in Crude oil and the SPY. It appears that when natural gas spikes excessively, global nations are trapped in a U.S. dollar based economic crisis to supply electricity, heat, and other economic essentials to their communities.
U.S. DOLLAR STRENGTH MAY DISRUPT ENERGY and CURRENCY VALUATIONS AS RECESSION LOOMS
This disruption in economic stability translates into greater risks for consumers, manufacturers, governments, and others. The shock of rising natural gas prices while the U.S. dollar is strengthening presents a real problem for many foreign nations dependent on importing energy.
This is likely why the recent natural gas price spikes have helped drive the SPY lower over the past 6+ months. The concern that rising energy costs could work to break economic function in certain nations becomes very real when natural gas moves to $3.50. It becomes even more critical when natural gas rises above $6~7.
My research suggests energy will continue to play a significant role in driving future trends in the global markets that conduct business transactions in various currency forms. It will simply push buyers and sellers to hedge foreign currency risks related to U.S. dollar strength or weakness. In short, the energy transactions will still be executed in a U.S. dollar base valuation – although they will be executed in foreign currency denominations.
There is one aspect of the deal between Russia and China that we’ll have to watch over the next 10+ years. Will this deal strengthen the Ruble and Yuan, or will it isolate these currencies and work to peg the Ruble/Yuan toward similar valuation levels? In a way, this is a bold move by Russia and China attempting to move their currencies into position to battle the U.S. dollar. But at the same time, if it fails to support the Ruble and Yuan, then it may work to devalue them in tandem.
The currency alliance between Russia and China may act as an anchor between the two currencies where any future broad global trends may drive both the Ruble and Yuan in a similar direction. The result could be an Oil/Energy based Ruble/Yuan correlation to the U.S. dollar or British Pound.
If natural gas begins to slide downward over the next 6+ months and breaks below $5.50, then I believe we may see a resurgent upswing in US stocks and other assets. Until then, I think the continued economic and global energy crisis will hang over the US markets headed into Winter 2022.
There is a chance that US markets may start a Christmas Rally over the next 30+ days and attempt to move into some type of end-of-year rally phase. But the global risks related to energy prices, inflation, and the US Fed may continue to disrupt rally attempts closing out Q4:2022. In short, we may not see any real relief from energy/inflation pressures until Q1 or Q2 2023.
Don’t try to be a hero with these market trends. Learn to protect your assets and target your trading style toward the best opportunities for profits.