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December Fed Speculation Lifts Dollar Towards Range High, Equities Now Lag Risk

December Fed Speculation Lifts Dollar Towards Range High, Equities Now Lag Risk

2016-11-16 05:50:00
John Kicklighter, Chief Strategist
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Talking Points:

The ICE Dollar Index is just off a two-year range high as December Fed forecast stands at 94 percent

• Risk trends take a swing higher, but the saddled markets like emerging markets outperform the charged equities

• Brexit speculation reacts to data, Carney views, Supreme Court justice warning and rumor

See the DailyFX Analysts' 4Q forecasts for the Dollar, Euro, Pound, Equities and Gold in the DailyFX Trading Guides page

The DXY Dollar Index closed out a seven consecutive day run through Tuesday - matching the longest climb for the currency in years. There are a few comparable drives in the not-too-distant past. There is the March 2016 advance that was ultimately a temporary correction in a prevailing bear trend. Then there was drive through January 2015 which stood as a period of acceleration in a remarkably productive bull trend. Which historical reference is this current climb more closely related? A simplistic technical relationship won't do. We need to appreciate the circumstances that maintain the market's move. Fed rate speculation is the primary fuel now, but the tank is almost topped off.

This past session, positive import inflation and a round of Fed speeches that clearly supported a high probability rate hike at the upcoming (December 14th) policy meeting to the tune of 94 percent. That additional 2 percentage point climb over Monday helped push the Index towards its broad two-year range high. Could an additional 6 percentage points to certainty force a break - much less extend a bull trend? It would be a challenge. Risk trends in the meantime, is an unstable, but necessary floor beneath these forecasts. The S&P 500 and other equity benchmarks nudged higher, but recently depressed risk assets outperformed this past session.

Keeping tabs on the battered Emerging Market (EEM) and High Yield Fixed Income (HYG) ETFs, we can assess what degree of the market's appetite is for steadfast investment versus opportunistic grab. Given the outperformance of the latter, long road to trend for all and the surrounding fundamentals; it would be a struggle to transition to full commitment. Ahead, there are few milestones to anchor sentiment trends. Alternatively, Fed speak and producer inflation (PPI) will offer a robust Dollar backdrop. Brexit will be a theme that is also revisited. This past session offered inflation figures, BoE Governor Carney's testimony and headlines suggesting the withdrawal will not evolve smoothly. We discuss what is moving markets and what opportunities it promotes in today's Trading Video.

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