Saturday, November 19, 2016

Dollar rally not an election rally - continuation of long trend

The dollar is rising. There is no question that this rally is tied with the rise in US yields and expectations concerning fiscal policy for next year, but a close look at the dollar charts over the last ten years shows that this is a continuation of the dollar rally that started with the end of QE. This dollar trend has abated because the Fed has sent mixed signals on its interest rate intentions, but stronger Fed signals of a December rise have changed the market sentiment. The election has only served as an accelerator to this monetary trend. The combination of a tightening monetary policy and fiscal stimulus is a recipe for a dollar increase.

Are we forgetting the behavior of other central banks? Yes, but the pull of the Fed swamps the behavior of other central banks. That said, a BOJ that is focused on yield curve management and an ECB that is considering further corporate bond purchases shows central banks are not aligned with the Fed. 

For longer-term trends, it is the economics not a personality that drives the markets.

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