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Forex Strategy Video: Why Doubt the Dollar's, S&P 500's Incredible Bull Trends?

Forex Strategy Video: Why Doubt the Dollar's, S&P 500's Incredible Bull Trends?

2016-11-24 01:16:00
John Kicklighter, Chief Currency Strategist
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Talking Points:

• The DXY Dollar Index has climbed 3.8% with 6.5% gains versus JPY and 4.3% against the EUR since the US election

• For the benchmark US S&P 500 index, the 3.0 percent rally has pushed the market to a consistent record highs

• Momentum and short-term traders could have rode the wave, but a structural view still paints heavy skepticism

See what live coverage is scheduled to cover key event risk for the FX and capital markets on the DailyFX Webinar Calendar.

When there is remarkable momentum from a market or asset that doesn't truly meet your fundamental, technical, strategic and/or conditional assessment; should you cast aside doubt and simply fall in line? This question goes back to the question on whether it is better to be 'lucky' or 'good'. The tongue-in-cheek answer is 'lucky' - and that would the practical way to go if we were only talking about a single event in time. However, in the case of participating in a trend or trading a strategy over time; the preference is always 'good'. Now that is a relative description, but sticking to a well thought out strategy means avoiding risk and following higher probability scenarios. And, that is what I am aiming for with my views on the US Dollar and equities.

There is little doubt that both the US currency and equity indexes have been incredibly strong through these past months and particularly since the US Presidential election. That said, the fundamental winds that have supplied both performances lack for outright conviction. Rather there is a convenient confluence of various fundamental developments that have cobbled together a 13-year high for the Dollar and record high for the S&P 500. And, that unique and happenstance stitching together of circumstances looks to be limited on the existing motivation without second winds to reliably supply the next leg of these incredible climbs after liquidity returns following the US Thanksgiving holiday.

Between the two, the Dollar sports the more durable backdrop. The Federal Reserve has already carved out a divergent yield path for the Greenback that has a high probability of expanding into the future. Currently, the forecast for a December 14th rate hike stands at 100 percent according to Fed Fund futures. That outlook, however, comes with perhaps more conviction than the state of the global economy and financial system can reasonably supply. Nevertheless, the general rate bearing and cannibalizing strength for the US at the detriment to its trade partners is tangible. In comparison, the appetite for US equities is not an even risk reach. Meanwhile, the comparable aspect between US markets to global counterparts doesn't hold over as global threats would certainly undermine the world's largest economy as it would its second (China) or Emerging Markets. We discuss why I remain skeptical of the Dollar's and S&P 500's rally in today's Strategy Video.

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